India's current account deficit is expected to moderate to 1.6% of GDP driven by healthy services sector exports, rating agency CareEdge says in a note. According to the rating agency, a better-than-expected current account will be supportive of the overall balance of payment scenario, which will reduce the country’s external vulnerability amid global economic uncertainties. The rating agency estimates the CAD to be at 2.1% of GDP for FY23.

For FY24, the rating agency projects domestic exports to contract by 5% following an estimated growth of 3.5% in FY23. Lower global commodity prices are expected to translate into a lower value of imports easing the pressure on the merchandise trade gap, the rating agency says.

The rating agency projects imports to contract by 4% in FY24 on the back of healthy growth in FY23, which is estimated to be at 15%. “On the capital account front, global factors such as the economic growth scenario and the pace of monetary tightening by key central banks would be the major determinants for capital flows. Overall, we expect the balance of payment scenario to improve on account of the better-than-expected current account scenario,” the rating agency says.

According to the rating agency, for Q4 of FY23, while merchandise exports will remain weak, imports are also likely to fall further, resulting in further moderation in the merchandise trade deficit. “Moreover, buoyancy in the services trade surplus and remittances are likely to continue. This signals some relief for India’s external sector scenario with the current account deficit (CAD) projected at 2.1% of GDP in FY23, much better than our earlier expectation,” the rating agency says.

According to the rating agency, in Q3 of FY23, the country’s current account deficit narrowed to $18.2 billion (2.2% of GDP) from $30.9 billion in the previous quarter, primarily driven by the current account gap in the third quarter. However, the merchandise trade deficit narrowed to $72,7 billion in Q3 FY23, lower compared to $88.3 billion in Q2 FY23. “While the sequential narrowing in the merchandise trade gap is positive, it is important to note that this is on account of a fall in both imports as well as exports compared to the previous quarter instead of the ideal scenario of higher export growth,” the rating agency says.

In Q3 FY23, services exports grew by 24.5% year-on-year (YoY) driven mainly by exports of software services which recorded growth of 18.5% YoY. With this, the service trade surplus stood at $38.7 billion. Software services which are the largest component of India’s services trade recorded an all-time high trade surplus of $33.5 billion.

Services Sector Exports

CAD to moderate to 1.6% of GDP, exports to contract by 5% in FY24: CareEdge Ratings