India's current account deficit to remain in 1.2-1.5% range of GDP in FY25

India's current account deficit (CAD) is projected to remain in the manageable range of 1.2-1.5 per cent of GDP in FY25, according to a new report.

The country's CAD narrowed to 1.2 per cent of GDP in Q2 FY25 from 1.3 per cent in Q2 FY24, despite a higher trade deficit, supported by buoyant services exports and strong remittances, according to a Bank of Baroda (BoB) report.

Capital account surplus expanded, led by foreign portfolio investor (FPI) inflows, while foreign direct investment (FDI) outflows were recorded higher. As a result, balance of payment (BoP) surplus was recorded higher at $18.6 billion compared with $2.5 billion in Q2 FY24.

“India's external sector outlook has not changed materially in the last few months. While the sharp surge in trade deficit in November 2024 has raised some concerns, this is likely to be a one-off, as the deficit was almost entirely driven by a surge in gold imports,” said Aditi Gupta, economist, Bank of Baroda.

Overall, India's balance of payments was supported by robust inflows from FPIs, ECBs and NRI deposits.

Moreover, growth in merchandise imports continues to outpace the growth in goods exports which has led to a widening of trade deficit on a FYTD basis (April-November).

“On the positive side, services exports have been resilient, which has been the primary driver of keeping CAD contained at comfortable levels,” said Gupta.

“Remittances too have been resilient despite lower oil prices. Increased threats of a protectionist trade policy being implemented by the incoming US President, will be a key threat for the external sector outlook,” she mentioned.

On balance, “we expect CAD to remain in a manageable range of 1.2-1.5 per cent of GDP in FY25,” said the report.