Current Account Deficit expected to reach year's high of 1.2 % of GDP in FY24 third quarter, predicts ratings agency

India Ratings and Research (Ind-Ra) has released its analysis on the current account balance (CAB) for the third quarter of the fiscal year 2023-24 (3QFY24), projecting a deficit of approximately USD11 billion, equivalent to 1.2 per cent of the Gross Domestic Product (GDP). According to a press release, this forecast represents a marginal increase from the previous quarter's deficit of 1.0 per cent of GDP and marks a year's high, surpassing the deficit recorded in the corresponding quarter of the previous fiscal year (3QFY23: USD16.8 billion, 2.0 per cent of GDP).

Sunil Kumar Sinha, Principal Economist at Ind-Ra, expressed expectations for a dip in the current account deficit in the subsequent quarter, attributing this outlook to signs of economic recovery amidst the global economic environment's uncertainties. Sinha said, "Ind-Ra expects the current account deficit to dip in 4QFY24. Although the global economic environment remains uncertain, there are nascent signs of a pick-up in economic activity. The global manufacturing Purchasing Managers' Index (PMI) expanded for the first time in 17 months in February 2024 (50.3).

The expansion was stronger in the US and emerging economies (barring the European region)." He noted that the global manufacturing Purchasing Managers' Index (PMI) expanded for the first time in 17 months in February 2024, with particularly robust growth observed in the US and emerging economies, except for the European region. Ind-Ra anticipates merchandise exports to rise to approximately USD117 billion in 4QFY24, marking a 2 per cent year-on-year increase and reaching a seven-quarter high. Correspondingly, merchandise imports are expected to reach a six-quarter high of around USD180 billion in 4QFY24, reflecting an 8 per cent year-on-year growth.

This is projected to result in a moderation of the goods trade deficit to USD64 billion in 4QFY24. Paras Jasrai, Senior Analyst at Ind-Ra, highlighted the resilience of services demand despite global challenges, with indicators such as the global services PMI reaching a seven-month high in February 2024. He predicted that the services trade surplus would maintain its upward trajectory, reaching a new high of USD47 billion in 4QFY24. Jasrai said, "Ind-Ra expects the merchandise exports to increase to around USD117 billion in 4QFY24, up 2 per cent yoy.

This would be a seven-quarter high. Likewise, the merchandise imports are expected to touch a six-quarter high of around USD180 billion in 4QFY24, up 8 per cent yoy. Overall, Ind-Ra expects the goods trade deficit to moderate to USD64 billion in 4QFY24." "Services demand has remained healthy despite global headwinds. The trend continues to be strong with the latest high frequency indicators. The global services PMI touched a seven-month high of 52.4 in February 2024 with the push emanating from both the developed as well as emerging markets. Thus, Ind-Ra opines the services trade surplus to sustain the record-breaking run and stand at a fresh high of USD47 billion in 4QFY24," Jasrai said.

In 3QFY24, merchandise exports experienced a year-on-year growth of 1.1 per cent, driven by demand from key markets such as the US, the UAE, and the Netherlands. However, sequential data showed a slight decline in exports, falling short of expectations. On the import front, merchandise imports reached a year's high of USD176.2 billion in 3QFY24, with notable increases observed in intermediate and consumer durable goods. Despite this, overall goods imports saw only a marginal year-on-year growth of 0.1 per cent, primarily due to a contraction in primary goods imports.

The report also highlighted a decline in energy and non-energy prices, accompanied by a rise in precious metals prices during 3QFY24. Consequently, the import volumes of critical commodities such as petroleum crude and products, coal, and manufactured fertilizers continued to decline during the quarter.