Remittance inflows and exports of resilient services are probably going to mitigate the overall effect, keeping the CAD for FY25 within a reasonable range of 1.2% to 1.5% of GDP.December 28, New Delhi, India (ANI): According to a Bank of Baroda analysis, a spike in gold imports is predicted to cause India's Current Account Deficit (CAD) to surpass 2% of GDP in the third quarter of FY25.
Remittance inflows and robust services exports, however, are probably going to mitigate the overall effect and keep the CAD for FY25 within a reasonable range of 1.2% to 1.5% of GDP.
In Q2 of FY25, India's CAD decreased marginally to 1.2% of GDP from 1.3% during the same time the previous year. The merchandise trade imbalance expanded from USD 64.5 billion in Q2 FY24 to USD 75.3 billion in Q2 FY25, which is another factor contributing to the higher CAD. Gold imports increased by USD 5 billion annually, which was mostly attributable to greater non-oil imports.
With a net services balance of USD 44.5 billion in Q2 FY25, up from USD 39.9 billion the year before, the services sector, on the other hand, showed promise. Exports of business services and software were very robust, and private remittances increased to USD 29.3 billion, which helped keep CAD under control.
In Q2 FY25, India's capital account surplus was USD 11.9 billion, up from USD 10.3 billion in Q2 FY24.
A major factor was the dramatic increase in Foreign Portfolio Investment (FPI) inflows, which rose from USD 4.9 billion to USD 19.9 billion last year.
Increased withdrawals of foreign direct investment (FDI) were counterbalanced by positive contributions from external commercial borrowings (ECBs) and non-resident Indian (NRI) deposits.
Thanks to strong capital inflows, the balance of payments (BoP) saw a notable surplus of USD 18.6 billion in Q2 FY25, up from USD 2.5 billion in the same time the previous year.
The research made clear that a stronger US currency and weak FPI inflows in recent months are likely to put pressure on the Indian rupee. In the near future, Bank of Baroda anticipates that the rupee will fluctuate between 84 and 85.5/USD.
It is believed that the spike in the trade imbalance in November 2024, which was mostly caused by imports of gold, was an isolated incident. The Bank of Baroda did, however, highlight certain possible dangers, such as the potential for protectionist trade policies under the next US government.
Exports of robust services and remittance inflows are anticipated to maintain acceptable CAD levels for FY25 in spite of these worries. (ANI)
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