India's current account deficit (CAD) has increased marginally to $9.7 billion in the first quarter (April-June) of the financial year 2024-25, which is 1.1% of GDP. It was $8.9 billion (1.0% of GDP) in the April-June quarter of FY 2023-24.
At the same time, there was a surplus of $ 4.6 billion (0.5% of GDP) in the fourth quarter of the financial year 2023-24. The Reserve Bank of India has released these figures on September 30. RBI said the growth in CAD on an annual basis was due to the increase in merchandise trade deficit. This increased to $65.1 billion in the first quarter of FY2025 from $56.7 billion in the first quarter of FY2024.
Growth of $5.2 billion in foreign exchange reserves
Net foreign direct investment inflows on the financial account increased to $6.3 billion in Q1FY25 from $4.7 billion in the corresponding period of 2023-24. Foreign exchange reserves (on BoP basis) grew by $5.2 billion in Q1FY2024-25 compared to $24.4 billion in Q1FY2024.
Net inflow declined to $0.9 billion in the first quarter
Net inflow under foreign portfolio investment declined to $0.9 billion from $15.7 billion in Q1FY24. Net inflows under external commercial borrowing (ECB) in India stood at $1.8 billion in Q1FY25, down from $5.6 billion in the same period a year ago.
Current account deficit likely to be more than 1% in financial year 2025
Experts say that the current account deficit is likely to be more than 1% in financial year 2025, whereas last year it was 0.7%. However, it is expected to remain below 2%. Talking about balance of payments, India's inclusion in global indices is expected to help the economy through capital imports.
Experts say that the current account deficit is likely to be more than 1% in financial year 2025, whereas last year it was 0.7%. However, it is expected to remain below 2%.
What is current account deficit?
It is a part of the component balance of payments that records a country's total international trade. Through this, countries find out how much income they earned from goods sold abroad and how much they had to spend on importing goods from abroad.
If the income earned from exports is less than the expenditure incurred for imports, then it is called current account deficit. At the same time, if the expenditure incurred for import is more than the income from export, then it is called current account surplus.
Let us understand this with an example…
Suppose country 'A' traded worth ₹100. In this he imported a total value of ₹ 60 from country 'B, C and D' and gave dollars in return. Whereas exported value of ₹40 to countries 'E,F,G and H' and took dollars in return.
Here the trade balance of country A i.e. the difference between import and export (60-40=20) will be ₹20. But, here country A has imported more than exported. Therefore its trade balance will be negative i.e. there will be a trade deficit of value of ₹20.
What are the advantages and disadvantages of decreasing or increasing CAD?
Current account deficit has a direct impact on the country's economy, stock market and investment. If it decreases, i.e. if exports are more than imports, then the confidence of investors in the country increases and they are able to invest more.
Due to this, along with increasing the foreign exchange reserves, the value of the local currency increases. On the other hand, if CAD is high, that is, there is more import than export, then in this situation the opposite result occurs.
Graphics Source: VaskarAssets
