The current account deficit (CAD) had been improving since the second quarter of FY23 thanks to a decline in value of imports and improvement in services exports. But the slowdown in advanced economies, caused by the aggressive monetary tightening by global central banks is now beginning to take its toll. Though the current account deficit for the first quarter of FY24 at $9.2 billion, has almost halved compared to the same quarter in FY23, it has expanded sharply on a sequential basis from $1.3 billion in the March 2023 quarter.

The sequential expansion in CAD is despite the merchandise trade deficit remaining at almost same level, with crude oil price staying benign and other commodity prices too staying muted. Lower oil and non-oil exports have been offset by a commensurate decline in the value of imports. However, the increase in CAD in the first quarter this fiscal year is largely due to decline in invisibles exports, especially non-software exports which fell from $4.7 billion in the March 2023 quarter to $1.2 billion in the June 2023 quarter. Software exports registered a slight decline of $500 million. Slowing demand in advanced economies caused by higher interest rates is leading to corporates cutting back on expenditure, impacting services exports. A silver lining in the external balance for the June quarter was the capital account balance increasing to $34.4 billion, the highest since the second quarter of FY22. This was largely due to strong foreign portfolio flows into equity markets.

But the situation is likely to grow challenging in the coming quarters. Global crude oil price is up 40 per cent since June. As demand for fuel increases in the winter months, prices are unlikely to correct sharply in the near term. Global central banks are leaning towards holding interest rates higher to get inflation under control; this is not good for the CAD. Growth in services exports will be muted going ahead as companies in advanced economies push-back non-essential spends in a bid to protect their margins in challenging demand conditions. Capital account is also likely to face duress in the coming quarters as foreign portfolio investors have already turned net sellers in Indian equity as a stronger dollar is making global funds move money back to dollar denominated securities. Remittances from NRIs were down 38 per cent sequentially while FDI inflows were down 20 per cent on tighter liquidity conditions globally. These trends could continue for a few more quarters as central banks continue to drain surplus liquidity. 

The RBI will have to take note of the weakening external balance while framing its upcoming monetary policy. With the 10-year bond yields in the US hardening to 4.5 per cent, the spread between the Indian and the US sovereign bond yields has narrowed significantly. The RBI may have to follow other central banks and keep rates at elevated levels to protect the rupee and prevent capital outflows.  

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