India Ratings and Research (Ind-Ra) expects the current account deficit (CAD) to have widened to $28.4 billion (3.4% of GDP) in Q1 FY23, as against a deficit of $13.4 billion (1.5% of GDP) in Q4 FY22. During Q1 FY22, India had a positive current account balance of $6.6 billion, 0.9% of GDP.

As a share of GDP, this will be a 36-quarter high (Q1 FY14: 4.7%), and in level terms, it would be at a 38-quarter high (Q3 FY13: $31.8 billion), Ind-Ra says.

The research firm expects India’s merchandise exports to slow down despite touching a record high of $121.2 billion in Q1 FY23, and estimates it to come in at $104.2 billion in Q2 FY23, a 1.4% year-on-year growth as compared to Q2 FY22 due to the global headwinds. 

Pointing out that the GDP forecasts of some of India’s key exporting destinations such as the US, Eurozone and China have been revised downwards, Ind-Ra says this may put India’s export targets of $750 billion (goods and services) for FY23 in jeopardy.

On the Q1 FY23 merchandise exports, Ind-Ra pointed out that key commodities such as ‘petroleum products’, ‘telecom instruments’, ‘ready-made garments cotton inclusive accessories’, ‘wheat’, ‘sugar’, ‘articles of iron & steel’, ‘gold and other precious metal jewellery’, ‘motor vehicles’ and ‘aluminium & its products’ accounted for more than 80% of the merchandise exports growth. 

It also noted the export of telecom instruments during the quarter increased fourfold in volumes. The push came from higher demand from Hong Kong, the UAE, the US, China, Vietnam, Germany and South Korea. 

Similarly, India’s wheat exports benefited due to the Russia-Ukraine war as the warring countries accounted for over 25% of the global wheat exports in 2021. India’s wheat export volume quadrupled in during the quarter, with the wheat demand coming from South Korea, Indonesia, Yemen, the UAE, Thailand, the Philippines and Oman, the agency observes.

On the other hand, Ind-Ra expects merchandise imports to remain robust due to elevated global commodity prices (Brent crude averaged August 2022: $100.7/barrel) and a weak rupee. It says the Indian rupee will average ₹79.6 against the US dollar in Q2 FY23.

Furthermore, the merchandise imports, which grew 40.5% YOY during July-August 2022 to $128.2 billion, are expected to come in at $ 192.2 billion in Q2 FY23, increasing by 30.3% YoY (Q2 FY22: 67.1% YOY). All in all, Ind-Ra expects the merchandise trade deficit to come in at a fresh high of around $87 billion in 2Q FY23.

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