That, and robust financial flows lead to forex accretion in the third quarter

India’s current-account deficit (CAD) narrowed to 2.2% of GDP in the third quarter of fiscal 2023 from 3.7% in the second quarter, thanks to a lower merchandise-trade deficit and higher surplus in services trade. This was buttressed by an increase in foreign remittances during the quarter.

Not only did the CAD narrow in the third quarter, but also the financial flows were more than sufficient to fund the CAD, leading to an accretion to foreign exchange reserves, as against the depletion in the previous quarter. To be sure, while both foreign portfolio investments (FPI) and foreign direct investments (FDI) fell on-quarter in the third quarter, it was the sharp uptick in other investments (mainly banking capital) that resulted in the wider financial-account surplus.

Robust services exports and remittances helped narrow CAD substantially in the third quarter

Balance of payments: Highlights

CAD narrowed precipitously to $18.2 billion (2.2% of GDP) in the third quarter (Oct-Dec) of fiscal 2023, from $30.9¹ billion (3.7% of GDP) in the second quarter of fiscal 2023 and $22.2 billion (2.7% of GDP) in the third quarter of fiscal 2022. With this, CAD stood at $67.0 billion (or 2.7% of GDP) during April-December 2022, compared with $25.3 billion (1.1% of GDP) in the year-ago period. That said, CAD peaked in the second quarter of fiscal 2023 and appears to be on a decline now.

CAD narrowed in the third quarter, as goods trade deficit declined to $72.2 billion from $78.3 billion in the second quarter (imports declined faster than exports), helped by a moderation in international energy prices, particularly oil and natural gas.

At the same time, services trade surplus rose to $38.7 billion from $34.4 billion in the second quarter, thanks to a healthy uptick in services exports (IT, business and travel services). It is noteworthy that travel services were back in surplus for the first time since the fourth quarter of fiscal 2020 - i.e., January-March 2020 quarter - thanks to the surge in personal travel, reflecting the uptick in the number of foreigners visiting India. Business travel, however, remains in the red.

¹ Revised down from $36.4 billion (4.4% of GDP) provided earlier by RBI, due to downward adjustment to customs data.At the same time Q1FY23 CAD was revised down to 2.1% of GDP from 2.2% earlier due to upward revision in the GDP estimate by the NSO