India’s current account deficit is likely to have improved in the final quarter of 2022 from a nine-year high in July-September as the goods trade gap moderated and net services exports rose, a Reuters poll found. The median forecast of 22 economists polled March 16-23 showed a current account deficit of $23.0 billion in October-December 2022, or 2.7% of gross domestic product (GDP). Forecasts ranged from $15.0-$28.0 billion, or 2.0%-3.2% of GDP.
In July-September, the gap was $36.4 billion. As a percentage of GDP, at 4.4% it was the highest since mid-2013. More than half of the expected narrowing is due to a reduction in the goods trade deficit, suggesting weakening domestic demand in Asia’s third-largest economy. India’s merchandise trade deficit shrank to $72.79 billion last quarter, compared to $78.32 billion in July-September, according to ministry of commerce data.
An increase in net services exports also partly contributed to the improvement, according to Reserve Bank of India figures. They rose to $39.03 billion from the preceding quarter’s $34.43 billion. “Imports have contracted more than expected. Core imports, which are exclusive of volatile components such as oil or gems and jewellery, declined marginally in the December quarter. That tells you how demand is underpinning in India,” said Radhika Piplani, an economist at Yes Bank.
“On the other hand, services have outperformed. These are the two reasons why we are seeing that the (current account deficit) numbers are better.” A separate Reuters poll of economists who had a longer-term view forecast the current account gap to average 3.0% of GDP this fiscal year before shrinking to 2.6% in the next.
However, the expected improvement has had little impact on the Indian rupee (INR). The outlook was for the currency to remain weak and not recoup its 2022 losses over the next 12 months, according to the latest Reuters FX poll.
“Although we are skeptical about the sustainability of such a high services surplus at this stage, the recent trends are certainly encouraging and point to a further narrowing of the external deficit in coming quarters,” noted Nikhil Gupta, research analyst at Motilal Oswal. “However, we do not expect INR to strengthen.”
