India's current account deficit surged to a nine-year high of $23 billion in the third quarter of financial year 2021-22 from $9.9 billion in July-September 2021 due to higher merchandise imports, data released by the Reserve Bank of India (RBI) showed.

As a percentage of GDP, the current account deficit was at 2.7% in the third quarter compared with 1.3% in the preceding three months. India's CAD stood at $2.2 billion in Q3 FY21.

"The Q3 FY2022 deficit has undershot the lower end of our expectation band of $24-28 billion, with a better-than-anticipated outcome for the balances of goods, services and secondary income," ICRA said in a report.

The sequential widening of the deficit was on account of the spike in merchandise trade deficit to $60.4 billion in Q3 FY2022 from $44.4billion in Q2 FY2022, the rating agency said.

ICRA expects the current account deficit to recede to around $17-21 billion in Q4 FY22, with the third wave temporarily curtailing certain imports.

The CAD in FY22 is projected at $43-47billion or 1.5% of GDP in contrast to the surplus of $24.0 billion or 0.9% of GDP in FY21.

ICRA expects merchandise exports and imports to increase significantly by around 42% and 55%, respectively, in FY22 to around $418-422 billion, and $615-617 billion, respectively. As a result, the merchandise trade deficit is projected to nearly double to around $194-196 billion in FY22 from $102.2 billion in FY21, ICRA said.

The services trade surplus is likely to rise by around 18% to $106-108 billion in FY22, the rating agency stated.

For the current fiscal, if the ongoing geo-political tensions between Ukraine and Russia push up the average price of the Indian crude oil basket to around $105 per barrel, then the CAD is projected to widen to $90-95 billion or 2.6% of GDP, ICRA said.

Net financial flows to India fell sharply to $23.4 billion in Q3 FY22 from $40.4 billion in Q2 FY22 and also trailed the levels seen in Q3 FY21, ICRA said, adding that lower net FDI inflows and large FPI outflows led to the fall in financial flows.

Owing to the sharp increase in the CAD and lower financial flows, the accretion to foreign exchange reserves dropped to a 12-quarter low of $0.5 billion in Q3 FY22 from an average of $31.5 billion in Q1 FY22 and Q2 FY22, the report said.

On March 23, India achieved the ambitious target of $400 billion of goods exports nine days ahead of schedule.

While higher commodity prices will inflame imports in March 2022, the volume of oil imports will play a key role in determining the size of the trade deficit, according to ICRA. "We expect the trade deficit to remain higher than $20 billion in March 2022."

The geopolitical conflict as well as supply-chain implications in China will weigh on the sectors such as automobiles, which are partly dependent on key raw materials provided by Russia, Ukraine or China, in the absence of any other alternatives, it said.

The increase in key commodity prices amid Russia-Ukraine conflict, elevated freight costs, persistent shortage of containers, as well as the supply chain implications of the renewed lockdowns in China following the outbreak of a fresh Covid-19 wave, do not augur well for the performance of cargo shipments at ports, it added.

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