CAD surges to record $36.4 billion in Sept quarter

India's second-quarter current account deficit (CAD), or the excess of imports over exports, rose to its highest since the so-called taper tantrum of 2013 at 4.4% of gross domestic product (GDP), but the central bank and financial experts believe healthy economic underpinnings and robust foreign exchange reserves will help Asia's third-biggest economy withstand the external imbalances.

New Delhi's current account balance recorded a deficit of $36.4 billion, or 4.4% of the GDP, in the September quarter, up from $18.2 billion, or 2.2% of the GDP, in the first quarter, data published by the Reserve Bank of India (RBI) showed. The deficit was at $9.7 billion, or 1.3% of the GDP, a year ago.

"Underlying the CAD was the widening of the merchandise trade deficit to $83.5 billion from $63 billion in the first quarter, and an increase in net outgo under investment income," the RBI said Thursday in a statement.

Governor Shaktikanta Das is about India's ability to withstand global shocks and external imbalances. "CAD is eminently manageable and let there not be any doubt about it," Das had said earlier this month.

'Double-Edged Sword'
Global trade is shrinking amid Covid-related disruptions in China and monetary tightening by central banks in the West as they struggle to restrain four-decade-high consumer inflation. This is taking a toll on currencies across the board - more so in Emerging Markets funding imports through capital flows. India is no exception, with oil imports climbing and exports slowing. But India's services sector is holding out, with software services leading from the front. With benign commodity prices, the outlook for India is set to improve in the coming quarters.

"A global slowdown serves as a double-edged sword for the external sector," said Sonal Varma of Nomura Securities. "On one hand, the domestic slowdown and lower global commodity prices should result in lower imports. On the other, the current account would be under pressure from lower exports, and the capital account would face outflows."

Nomura expects the deficit to narrow to 2.5% of GDP for 2023 from 3% in 2022 but, at nearly $100 billion, funding this deficit will still require large debt and equity inflows.



Re Outperformer among EM Peers
While there is worry about the weakness of the Indian rupee, which slumped during the capital outflows after then Fed chairman Ben Bernanke's 'taper tantrum' in 2013, the macro factors appear to be more favourable now than what they were a decade ago.

The rupee has in fact been an outperformer among EM peers. India's current account deficit in the September quarter of 2012 was at 5.4% of the GDP, and foreign exchange reserves were insufficient to fund imports and defend the exchange rate due to outflows.

But the script is very different this time around.

"The story of the Indian rupee is one of resilience and stability," said Das. "We remain committed to act to prevent excessive volatility of our exchange rate. Our focus will continue to be on the orderly evolution of the exchange rate."

The foreign exchange reserves have climbed to $563 billion now, from $524.5 billion on October 21.

Challenges Ahead
But the emerging situation could pose a challenge to the central bank as volatile capital flows and weakening services exports remain potential risks.

Services exports expanded 30.2% in the September quarter on year, on the back of rising exports of software, business and travel services. But the primary income account, mainly reflecting payments of investment income, saw an outflow at $12 billion from $9.8 billion a year ago, RBI data showed.

Reflecting the tight global monetary conditions, external commercial borrowings - a key source of capital flows - saw an outflow of $400 million compared with an inflow of $4.3 billion a year ago.

"The reading reflected a wider trade deficit, but this will likely be the peak of the current account deficit this fiscal year as commodity prices have eased," said Madhavi Arora, economist, Emkay Global Financial Services. "Net investment income will continue to be a larger drag amid higher interest rates abroad," she said, forecasting a current account gap of 3.4% of GDP for FY23.