“While the CAD remains manageable, the current uptick in oil prices means some upside pressure going ahead,” as per the report
Given weakening global growth and tighter monetary policies in advanced economies, financial flows are expected to be volatile, the rating agency Crisil has said in a recent report.
However, it stated that the current account deficit (CAD) should be manageable and its financing is unlikely to be a major concern if there are no major setbacks on oil and remittances.
While India’s CAD narrowed on-year, it rose sequentially in the first quarter of this fiscal, thanks to a rise in merchandise-trade deficit and a lower surplus in services trade.
Secondary income surplus, largely reflecting remittances, declined as well.
Notably, financial flows also went up significantly and were more than sufficient to fund CAD, leading to an accretion in foreign exchange reserves.
“The uptick in financial flows was largely a result of a surge in foreign portfolio investments (FPI), and other investments (largely banking capital), even as foreign direct investment (FDI) softened a bit,” the report added.
While the CAD remains manageable, the current uptick in oil prices means some upside pressure going ahead, it mentioned.
India’s CAD rose to USD 9.2 billion (1.1 per cent of gross domestic product) in the first quarter (April to June) of fiscal 2024, from USD 1.3 billion (0.2 per cent of GDP) in the fourth quarter of fiscal 2023.
That said, CAD was down from USD 17.9 billion (2.1 per cent of GDP) in the first quarter of fiscal 2023.
It also mentioned that the decline in services trade surplus during the first quarter seems to have been corrected in the second quarter and is likely to remain healthy going ahead.
“However, the decline in personal transfers will need monitoring, especially as global growth is expected to slow down,” according to the report.
The recent uptick in oil prices will also weigh on the merchandise trade deficit. Brent spot has already crossed USD 95/bbl from an average of USD 86.2/bbl in August. Together, these have put an upside to our CAD call of 1.8 per cent of GDP for this fiscal.