India's current account deficit is expected to hit a three-year high of 1.38% or $43.81 billion in the financial year 2021-22 compared to a surplus of $23.91 billion or 0.9% of GDP in FY21, according to India Ratings and Research (Ind-Ra).

The rating agency expects the current account deficit to have moderated to $17.3 billion (1.96% of GDP) in the fourth quarter of FY22, as against a deficit of $23.02 billion or 2.74% of GDP in the third quarter of FY22. CAD in Q4 FY21 stood at $8.2 billion or 1.03% of GDP.

Merchandise exports in FY22 jumped 42.4% as against a negative 7.5% in the pandemic-hit FY21.

The World Trade Organisation (WTO) has projected merchandise trade volume growth at 3% in 2022, down from its earlier forecast of 4.7%. The organisation pegs the imports volume growth for India's key exporting partners such as the U.S. (North America) and Europe at 3.9% and 3.7%, respectively, in 2022, lower than 4.5% and 6.8%, respectively, forecasted earlier.

India's merchandise imports are expected to accelerate on the back of escalated commodity prices and higher rupee depreciation in FY23, the rating agency says.

Ind-Ra expects the merchandise exports to come in at $112.5 billion, growing by 17.7% YoY in Q1 FY23. The merchandise imports grew 44.1% YoY during April-May 2022 to $120.9 billion and are expected to stand at $182.9 billion increasing by 44.1% YoY in Q1 FY23, the rating agency says.

This, according to the ratings firm, is due to normalisation of domestic economic activities, steep levels of commodity prices and inflated freight and transportation costs. Moreover, the Indian rupee is expected to depreciate to ₹77.1 against the U.S. dollar in Q1 FY23.

Merchandise exports in the January-March period grew 29.2% YoY to a record high of $116.8 billion, helping India achieve its ambitious target of $400 billion of goods exports in FY22 nine days ahead of schedule. For the full fiscal, exports scaled to a fresh high of $421.8 billion in FY22.

The import volumes of India’s top exporting partners such as the U.S. and Europe increased 9.7% YoY and 8.3% YoY, respectively, in Q4 FY22, explaining the high merchandise exports of India in the same period.

Key commodities such as petroleum products, iron and steel, aluminium and its products, pearl, precious and semi-precious stones, sugar, motor vehicles and cotton yarn contributed roughly 72.2% to the merchandise exports growth.

Gold imports declined 54% YoY after a period of seven quarters as the demand for gold had fallen by the same level in Q4 FY22 due to the onset of the third wave of Covid-19 during a period when there is generally a seasonal rush for gold.

Ind-Ra, however, says the stellar performance of India's merchandise exports in the financial year 2022-23 would face significant headwinds by the clouds of uncertainty and volatility in the global economy.

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