India’s current account deficit (CAD) swelled to an all-time high of $36.4 billion, which is around 4.4% of the country's GDP, in Q2 FY 2022-23, double from $18.2 billion during the previous quarter and way higher than $9.7 billion a year ago, the balance of payments data shared by the Reserve Bank of India (RBI) shows.

Before this, India had recorded the highest CAD of $31.77 billion in Q3 FY13. The CAD is the difference between the value of exports of goods and services and the value of imports of goods and services of a country.

The RBI attributed high CAD to the widening of the merchandise trade deficit to $83.5 billion from $63 billion in Q1 FY23 and an increase in net outgo under investment income.

The RBI said there was a depletion of foreign exchange reserves worth $30.4 billion in Q2 FY23 against an accretion of $31.2 billion in Q2 FY22. The net Foreign Direct Investment (FDI) also decreased to $6.4 billion in the said quarter from $8.7 billion a year ago.

Aditi Nayar, chief economist, ICRA Ltd, said while it was expected that India's current account deficit would widen to an all-time high in Q2 FY2023, the size of the deficit exceeded even the upper end of our forecast range of $31-34 billion. "Negative surprises in the merchandise trade deficit and primary income outweighed the higher than expected services surplus and secondary income flows."

Nazar said: "With a fall in the average trade deficit in Oct-Nov 2022 relative to the previous three months, and a robust services trade balance in October 2022, we are cautiously optimistic that the size of the CAD will recede appreciably to around US$25-28 billion in Q3 FY2023 from the all time high recorded in the previous quarter, while remaining substantial...we foresee a CAD of US$25-30 billion in Q4 FY2023. We project the FY2023 CAD at an unpalatable US$115 billion of GDP."

India recorded a CAD of 3.3% of GDP in H1 FY23 on the back of a sharp increase in the merchandise trade deficit as compared with 0.2% in H1 FY22.

The net FDI inflows at $20 billion in H1 FY23 also marginally declined from $20.3 billion in H1 FY22. Portfolio investment recorded a net outflow of $8.1 billion in H1 FY23 vs $4.3 billion a year ago. In H1, there was a depletion of $25.8 billion to the foreign exchange reserves, the RBI says.

The data shows the services exports grew 30.2% on a year-on-year (y-o-y) basis on the back of rising exports of software, business and travel services. The net services receipts also increased both sequentially and on a y-o-y basis. The net outgo from the primary income account, mainly reflecting payments of investment income, also increased to $12 billion from $9.8 billion a year ago.

The private transfer receipts, representing remittances by Indians employed overseas, amounted to $27.4 billion in Q2 FY23, up 29.7% from a year ago.

The net foreign portfolio investment recorded inflows of $6.5 billion, up from $3.9 billion during Q2 FY22. The net external commercial borrowings to India decreased from $4.3 billion a year ago to just $0.4 billion in Q2 FY23.

The RBI also released the 26th issue of the Financial Stability Report (FSR) today, which states the Indian economy is confronting strong global headwinds. "Yet, sound macroeconomic fundamentals and healthy financial and non-financial sector balance sheets are providing strength and resilience and engendering financial system stability," it added.

Buoyant demand for bank credit and early signs of a "revival" in the investment cycle are benefiting from improved asset quality, return to profitability and strong capital and liquidity buffers of scheduled commercial banks, it said. The report says the gross non-performing asset ratio of commercial banks (SCBs) fell to a seven-year low of 5% and net non-performing assets dropped to a 10-year low of 1.3% in September 2022.

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