Higher FDI flows lead to some forex accretion in the fourth quarter

India’s current-account deficit (CAD) narrowed sharply to 0.2% of gross domestic product (GDP) in the fourth quarter of fiscal 2023 from 2.0¹% in the third quarter, thanks to a drop in merchandise-trade deficit and higher surplus in services trade. But the quarter saw some sequential softening in remittances.

Not only did the CAD narrow in the fourth quarter, but also financial flows were more than sufficient to fund CAD, leading to an accretion in foreign exchange reserves. The magnitude, however, was less than in the previous quarter. This was largely a result of an uptick in foreign direct investments (FDI), even as foreign portfolio investments (FPI) fell, and other investments (largely banking capital) declined on-quarter.

The decline in merchandise trade deficit and higher services surplus helped reduce CAD substantially in the fourth quarter

Balance of payments: Highlights

CAD narrowed sharply to $1.3 billion (0.2% of GDP) in the fourth quarter (Jan-Mar) of fiscal 2023 from $16.8 billion (2.0% of GDP) in the third quarter of fiscal 2023 and $13.4 billion (1.6% of GDP) in the fourth quarter of fiscal 2022.

This was a result of a noticeable fall in goods trade deficit - to $52.6 billion from $71.3 billion in the third quarter (as exports rose and imports fell on-quarter), helped by moderation in international energy prices, such as crude oil, coal and natural gas. To be sure, non-energy prices (particularly metals and minerals) and gold prices firmed up during the quarter.

At the same time, services trade surplus rose to $39.1 billion from $38.7 billion in the third quarter, thanks to continued uptick in ‘computer’ and ‘professional, management and consulting’ services. The travel services, which registered a surplus for the first time in third quarter of fiscal 2023 since the pandemic began in 2020, remained in the green. But the surplus reduced as the sequential rise in spending by Indians on holidays abroad outpaced those by foreigners in India.

Interestingly, secondary income (which largely represents personal transfers from abroad), while remaining in surplus and supporting the overall current account balance, saw some moderation, as was reflected in net secondary income surplus assuaging to $24.7 billion in the fourth quarter, from $28.5 billion in the previous quarter. Within this, worker remittances came down to $14.7 billion from $17.7 billion. This could be the reflection of a) setting in of slowdown and tighter monetarty conditions in the advanced economies; and b) correction in oil prices, which has a bearing on the economic performance of Middle East countries that remain a dominant source of remittances to India.

¹ As per RBI, Q3 FY23 CAD has been revised downwards from US$ 18.2 billion (2.2% of GDP) to US$ 16.8 billion (2.0% of GDP) due to downward adjustment in Customs data