India’s Balance of Payments slips into deficit for first time in 13 quarters. What does this mean for the economy?

The CAD is the shortfall between the money received by selling products to other countries and spent to buy goods and services from other nations.

For the fourth quarter of FY22, India’s current account deficit (CAD) declined to $13.4 billion from $22 billion in the previous quarter. But it jumped more than 60 percent from $8.1 billion in the fourth quarter of FY21.

A widening CAD can be inferred as an imbalance in the economy, leading to implications on the domestic currency. For FY22, India's CAD stood at $38 billion, the highest since FY19 of $57 billion. The rise was owing to a strong inflationary environment, which led to a rise in the value of imported goods of $189 billion, the highest since FY13 of $196 billion when crude oil prices were at $108 per barrel, similar levels as today.

Kavita Chacko, a chief economist at Edelweiss Wealth Management, expects India’s CAD to widen in FY23. “It could be in the range of 2.6-2.8 percent of the gross domestic product in the ongoing financial year. This has implications for the Indian rupee. The weakness in the rupee is to prevail and expect the move in the range of 77.5 to 79 over the next 2-3 months,” Chacko said.

The foreign portfolio investors also withdrew $15.2 billion in the fourth quarter of FY22, higher than the $13.7 billion outflows witnessed in the same quarter of FY20 when India underwent its first COVID-induced lockdown and the Nifty saw lows of 8,000.

In FY22, the two initial quarters witnessed marginal FPI net inflows, while the subsequent quarters saw a reverse trend of net outflows. Net FPI outflows totalled $16.8 billion in FY22 versus net inflows of $36 billion in FY21. On the contrary, FY22 net inflows of foreign direct investment (FDI) stood at $38.6 billion, of which one-third was received in the last quarter.

India’s trade deficit has widened sharply, implying higher import of goods. However, the net export of services is the highest ever recorded. This may be ascribed to the ongoing inflationary environment and higher imports of commodities and electronics, among others.

The CAD, albeit at 1.5 percent of the GDP, nearly halved to $13.4 billion in the fourth quarter of FY22 against $22.2 billion or 2.6 percent of the GDP in the third quarter of FY22. The RBI said: “The sequential decline in CAD in the fourth quarter of FY22 was mainly on account of a moderation in the trade deficit and lower net outgo of primary income.”

FDI though was the lowest in past three years, but on the positive side, came in higher by 25 percent over FY19. While the FPI outflows were sharp in the past quarter, expectations of a rebound are high and not far off.