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India's Current Account Deficit Narrows to 0.7% of GDP in FY24: A Comprehensive Overview

  • Writer: chethan dk
    chethan dk
  • Jun 24, 2024
  • 2 min read

India's current account deficit (CAD) has seen a significant reduction, narrowing to 0.7% of GDP in FY24 from 2% in the previous fiscal year. This improvement is driven by robust services trade and substantial net portfolio inflows, according to data released by the Reserve Bank of India (RBI). Let's delve into the key factors contributing to this positive trend and explore the outlook for the coming fiscal year.

Key Highlights

1. Significant Reduction in Current Account Deficit

  • FY24 CAD: 0.7% of GDP, equivalent to $23.2 billion.

  • FY23 CAD: 2% of GDP, equivalent to $67 billion.

  • Q4 FY24: Surplus of 0.6% of GDP or $5.7 billion, a stark contrast to the previous year's deficit of 0.2% of GDP.

2. Boost in Services Trade

  • Services Exports Growth: 4.1% year-on-year in Q4 FY24.

  • Net Services Receipts: Increased to $42.7 billion from $39.1 billion the previous year.

  • Key Drivers: Rising exports in software, travel, and business services.

3. Increased Remittances and Portfolio Inflows

  • Remittances: Up by 11.9% to $28.6 billion in Q4 FY24.

  • Portfolio Inflows: Positive inflows of $11.4 billion in Q4 FY24 compared to an outflow of $1.7 billion a year earlier.

  • Annual Portfolio Investment: Net inflow of $44.1 billion in FY24, a significant turnaround from a $5.2 billion outflow in FY23.

4. Capital Inflows Ahead of Bond Index Inclusion

  • Global Bond Index Inclusion: India's inclusion in the GBI-EM Index suite on June 28 is expected to bring in $20-25 billion in capital.

  • Investor Activity: Increased debt inflows as investors took long positions in anticipation of the bond index inclusion.

5. Foreign Direct Investment (FDI) Trends

  • Net FDI Inflow: $9.8 billion in FY24, down from $28 billion in FY23.

  • Global FDI Ranking: India slipped to 15th place in 2023, as per a UNCTAD report.

  • Reason for Decline: Reduced fund flows from developed countries to emerging markets.

Outlook for FY25

Economists predict a slight increase in the CAD for FY25, potentially rising above 1% of GDP. However, this is expected to remain manageable, supported by steady capital inflows and strong economic fundamentals.

Madan Sabnavis, Chief Economist at Bank of Baroda, noted: "For FY25, going by the early trends, the CAD should be manageable at 1-1.5% of GDP, and the steady capital inflows should ensure that the balance of payments remains comfortable. This is expected to keep the rupee steady between 83-84 against the dollar."

Conclusion

India's current account deficit improvement in FY24 is a testament to the country's strong economic fundamentals and strategic financial management. The boost in services exports, increased remittances, and positive portfolio inflows have played a crucial role in this achievement. Looking ahead, while there may be some slippage in CAD, it is expected to remain within manageable levels, ensuring a stable economic outlook.

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