Country's current account deficit may be one percent of GDP in FY 2025, ICICI report claims

As per a report by ICICI Bank, India's current account deficit (CAD) is expected to be 1.1% of gross domestic product (GDP) in FY 2024-25 (FY25). The report highlights significant changes in the country's external position recently. According to the report, these changes have come due to trade deficit and foreign portfolio investment (FPI).

"We expect the current account deficit to remain at 1.1% of GDP in FY25," the report said. In November 2024, India's trade deficit reached a record high of USD 37.8 billion, mainly due to gold imports totaling USD 14.9 billion. Besides, imports of non-oil and non-gold products are increasing. It increased 3.5% year-on-year in October-November 2024. While the export of oil declined 36% during the corresponding months, non-oil exports showed positive growth during this period.

Electronics and engineering goods exports jumped by 50% and 27%, respectively, in October-November 2024. The report also mentioned that the trade deficit front is likely to continue facing the brunt of a weak global growth scenario despite some concerted efforts by the government on gold imports. This happens in the wake of rising interest rates globally, with the US Federal Reserve indicating a higher trajectory for rates.

The report said, “Even as the government works on reining in gold imports, the trade deficit scenario remains poor due to the subdued global growth outlook”.

It added that foreign direct investment (FDI) inflows remain robust. However, higher outflows due to withdrawals in India’s thriving primary equity market have eroded the gains. Resulting, the balance of payments (BoP) scenario has changed significantly. A surplus of US$23.8 billion was seen in the first half of FY25, while a sharp decline was seen in the second half.

The overall BoP surplus for FY25 is expected to remain neutral, with risks to turn negative if FPI outflows are higher than anticipated. On the positive side, India's services exports and remittances have seen strong growth, helping to mitigate the impact of higher gold imports and weak oil exports. The CAD remains manageable despite growing challenges in the trade and capital flow situation.