India's CAD Outlook: Mixed Factors Shape Economic Projections

India's Current Account Deficit (CAD) is predicted to surpass 2% of GDP in Q3 FY25, largely fueled by a spike in gold imports, as reported by Bank of Baroda. Despite this rise, strong services exports and remittances are expected to mitigate the impact, keeping CAD between 1.2%-1.5% of GDP.

India's Current Account Deficit (CAD) is projected to exceed 2% of GDP in the third quarter of FY25, primarily driven by a surge in gold imports, according to Bank of Baroda's latest report. Resilient services exports and a steady inflow of remittances are anticipated to cushion the blow, maintaining CAD within a manageable range of 1.2%-1.5% of GDP.

In Q2 FY25, India's CAD slightly narrowed to 1.2% from 1.3% in the previous year. The widening trade deficit, escalating to USD 75.3 billion from USD 64.5 billion year-on-year, largely accounted for this development, chiefly due to rising non-oil imports and a USD 5 billion increase in gold imports. In contrast, the services sector witnessed growth, with the net services balance reaching USD 44.5 billion, driven by robust software and business services exports. Private remittances, which increased to USD 29.3 billion, further aided in controlling the CAD.

On the capital account, India recorded a notable surplus of USD 11.9 billion, up from USD 10.3 billion year-on-year. A significant surge in Foreign Portfolio Investment (FPI) inflows, jumping to USD 19.9 billion from USD 4.9 billion, played a crucial role, along with positive contributions from Non-resident Indian deposits and External Commercial Borrowings.

Despite this favorable economic position, sluggish FPI inflows in recent months and a strong US dollar could pressure the Indian rupee, with the Bank predicting it to trade between 84-85.5/USD shortly. November 2024's trade deficit spike, primarily due to gold imports, is viewed as a singular event, though potential protectionist trade policies by the incoming US administration pose risks.

Nevertheless, resilient services exports and solid remittance inflows should keep CAD levels manageable for FY25. (ANI)

(With inputs from agencies.)