India’s current account deficit expands to 1% of GDP in March quarter

India’s current account deficit widened to 1% of GDP in March quarter of FY21 from 0.3% of GDP in the December quarter as trade deficit widened and net invisible receipts fell, according to data released by Reserve Bank of India on Wednesday.

For FY21, the current account balance recorded a surplus of 0.9% of GDP as against a deficit of 0.9% in FY20 on the back of a sharp contraction in the trade deficit to $102.2 billion from $157.5 billion in FY20.

Private transfer receipts, mainly representing remittances by Indians employed overseas, increased to $20.9 billion, up by 1.7% in March quarter from their level a year ago. In the financial account, net foreign direct investment at $2.7 billion in March quarter was lower than $ 12 billion during the same quarter a year ago while net foreign portfolio investment (FPI) increased by $7.3 billion – mainly on account of net purchases in the equity market – as against a decline of $13.7 billion in fourth quarter of FY20.

Aditi Nayar, chief economist at ICRA Ratings said normalisation in import demand as well as a surge in gold imports contributed to the widening of the current account deficit to $8.1 billion March quarter from $1.7 billion in the previous quarter, in spite of the massive increase in exports in the month of March.

“The size of the current account deficit in Q4 FY21 exceeded our forecasts, led by a lower than anticipated surplus of secondary income and services trade, whereas the outflow of primary income was also modestly higher than projected. With the widening state level restrictions shrinking the domestic demand for fuels and gold in May, we expect the current account to revert to a small, transient surplus in the ongoing quarter,” she added.

S&P Global Ratings on Wednesday said India’s stable sovereign outlook with lowest investment grade reflects its expectation that India's economy will recover following the resolution of the covid-19 pandemic, and that the country's strong external settings will act as a buffer against financial strains despite elevated government funding needs over the next 24 months.