India's current account deficit (CAD) will stay within tolerable levels during FY 2025-26, riding high on the services export and smooth remittance flow from expat Indian workers, a report by Crisil stated on Wednesday.
Aspirations rise amidst increased pressure on the merchandise trade deficit of the nation, according to the report, there would be just a marginal increase in CAD with a projection at 1.3% of GDP in FY 2025-26 against 1% for 2024-25.
CAD in the third quarter of FY 2024-25 was $11.5 billion (1.1% of GDP), which is stable compared with the corresponding quarter last year at $10.4 billion (1.1% of GDP). Sequentially, however, the deficit decreased from $16.7 billion (1.8% of GDP) in the previous quarter.
The rising merchandise trade deficit during Q3 FY25 was led mainly by a fall in oil exports and an increase in imports. Nevertheless, this was offset by an increase in a higher services trade surplus and enhanced remittances from Indian expatriates.
The report also highlights that foreign capital witnessed a net outflow during Q3, contrasting with a net inflow in the same period last year. This contributed to a 1.6% depreciation of the Indian rupee, which fell to 84.5 per US dollar in Q3 FY25 from 83.2 in the corresponding quarter of the previous fiscal year.
Among the sub-components of financial accounts, all the categories witnessed outflows, led by the exit of foreign portfolio investors (FPI) of $11.4 billion. Other investment outflows were also seen for the first time since Q2 FY 2023.
The net financial account outflow along with the current account deficit caused the forex reserves of India to plummet by $37.7 billion in Q3. Yet the fall was only partially caused because of Reserve Bank of India selling US dollars into the forex market to limit uncontrolled rupee volatility.
Ever since, forex reserves have recovered, increasing to $658.8 billion as of March 21, from $644.4 billion at the end of Q3, indicating better market stability.
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