India’s Current Account Deficit Set to Exceed 2% of GDP in Q3 FY25 Due to Surge in Gold Imports
India’s Current Account Deficit (CAD) is projected to surpass 2% of the GDP in the third quarter of FY25, largely driven by a significant rise in gold imports, according to a recent report by Bank of Baroda. Despite this increase, the report suggests that robust services exports and remittance inflows will help mitigate the impact, keeping the CAD for FY25 within a manageable range of 1.2% to 1.5% of GDP.
In the second quarter of FY25, India’s CAD narrowed slightly to 1.2% of GDP from 1.3% in the same quarter of the previous year. The widening of the CAD is primarily attributed to a higher trade deficit, with India’s merchandise trade deficit rising to USD 75.3 billion in Q2 FY25, compared to USD 64.5 billion in Q2 FY24. This increase was driven mainly by higher non-oil imports, including a USD 5 billion year-on-year rise in gold imports.
On a positive note, India’s services sector emerged as a strong performer, with net services balance increasing to USD 44.5 billion in Q2 FY25, up from USD 39.9 billion in the same period last year. Exports from the software and business services sectors were particularly robust, while private remittances saw growth, reaching USD 29.3 billion. These factors have been instrumental in helping to contain the CAD.
In terms of capital flows, India recorded a surplus of USD 11.9 billion in the capital account in Q2 FY25, compared to USD 10.3 billion in Q2 FY24. A sharp surge in Foreign Portfolio Investment (FPI) inflows, which jumped to USD 19.9 billion from USD 4.9 billion in the previous year, played a key role in bolstering this surplus. Other contributors included non-resident Indian (NRI) deposits and External Commercial Borrowings (ECBs), which helped offset increased Foreign Direct Investment (FDI) outflows.
The balance of payments (BoP) saw a significant surplus of USD 18.6 billion in Q2 FY25, up from USD 2.5 billion in Q2 FY24, driven by strong capital inflows.
Despite concerns over sluggish FPI inflows in recent months and the pressure of a stronger US dollar on the Indian rupee, the report suggests that the rupee will likely trade within the range of 84-85.5/USD in the near term.
The surge in the trade deficit, particularly in November 2024, driven by gold imports, is expected to be a temporary phenomenon. However, the Bank of Baroda has raised concerns about potential risks, such as the possibility of protectionist trade policies under the incoming US administration.
Overall, while the CAD may experience temporary pressure due to higher imports, particularly of gold, resilient services exports and strong remittance inflows are expected to keep India’s CAD at manageable levels for FY25.
