India's CAD Maintains Stability Amid Geopolitical Risks

India's current account deficit remains stable at approximately 1% of GDP for fiscal 2025, attributable to strong financial inflows and a steady services surplus. Despite geopolitical risks and rising trade deficits, robust foreign investments and remittances are expected to sustain economic stability, as detailed by a CRISIL report.

India's current account deficit (CAD) is projected to stay within a safe threshold, approximately 1% of GDP for fiscal year 2025, rising from 0.7% in the preceding year, a CRISIL report details. Geopolitical tensions require vigilant oversight, yet strong financial inflows and a stable services trade surplus are pivotal for economic stability.

In the second quarter of fiscal 2025, the CAD was relatively stable at USD 11.2 billion or 1.2% of GDP, compared to USD 11.3 billion (1.3% of GDP) during the same period last year, according to the Reserve Bank of India. Despite a slight sequential increase, strong services exports and robust remittances provided a cushion against the pressures of a rising merchandise trade deficit.

Overall trade deficit rose to 3.4% of GDP in Q2 FY2025 from 2.9% a year prior, with the merchandise trade deficit climbing to 8.2% of GDP from 7.5%. The services trade surplus edged up to 4.9% from 4.7%, while the primary income account deficit decreased to 1% from 1.4% and the secondary income account surplus expanded to 3.2% from 2.9%. Financial inflows increased significantly, led by substantial foreign portfolio investments (FPI), which soared to USD 19.9 billion from USD 4.9 billion the previous year, encompassing equity inflows of USD 10.7 billion and debt inflows of USD 9.1 billion.

Other investments, notably non-resident Indian (NRI) deposits and external commercial borrowings (ECBs), also saw marked growth. NRI deposits surged to USD 6.2 billion, in contrast to USD 3.2 billion last year, and net ECBs improved to USD 5 billion, shifting from an outflow of USD 1.9 billion in Q2 FY2024. However, net foreign direct investment (FDI) experienced outflows of USD 2.2 billion, nearly tripling from USD 0.8 billion in Q2 FY2024, owing to heightened FDI outflows of USD 23.5 billion.

India's forex reserves grew by USD 18.6 billion during the quarter, significantly up from USD 2.5 billion in Q2 FY2024. Nonetheless, the rupee depreciated to 83.8 per dollar in Q2 FY2025 from 82.7 per dollar the previous year. Since then, forex reserves have declined to USD 644.4 billion as of December 20, 2024, down from USD 692.3 billion at the end of Q2, as the Reserve Bank of India intervened to stabilize the rupee. (ANI)

(With inputs from agencies.)