India’s current account deficit (CAD) widened to $9.7 billion (1.1% of gross domestic product (GDP)) in the first quarter (April-June) of fiscal 2025, data from the Reserve Bank of India (RBI) showed. This compares with a deficit of $8.9 billion (1% of GDP) in the first quarter of fiscal 2024. It also signifies a U-turn from a surplus of $4.6 billion (0.5% of GDP) in the fourth quarter of the previous fiscal.
The on-year widening in CAD was largely driven by a rise in merchandise trade deficit to $65.1 billion from $56.7 billion a year ago. While muted global demand weighed on export growth (up 6.0% on-year) in Q1 fiscal 2025, higher crude oil prices and logistics costs amidst geopolitical tensions pushed up imports significantly faster (8.4% on-year). That said, services trade surplus and secondary income (largely remittances) grew, providing a cushion to the current account balance.
As a result of the reversal in CAD to deficit from surplus and lower financial inflows, the rupee depreciated mildly in Q1 fiscal 2025 to average 83.42/$, compared with 83.02/$ in Q4 fiscal 2024. In Q1 FY24, the rupee had averaged 82.2/$.
Meanwhile, although financial flows fell on-year, they were sufficient to cover the CAD. Therefore, accretion to foreign exchange (forex) reserves slowed to $5.2 billion in Q1 fiscal 2025 from $24.4 billion in Q1 fiscal 2024. At the end of the first quarter, India had forex reserves of $653.7 billion, which rose to $692.3 billion as of September 20, 2024.
It is noteworthy that although the overall financial flows declined in Q1 fiscal 2025, foreign direct investment (FDI) inflows increased compared with Q1 FY2024, along with a rise in NRI deposits.
Even as merchandise trade deficit has come under some pressure, robust services exports and healthy remittances flow should help keep the CAD in the safe zone this fiscal. We expect CAD at ~1.0% of GDP in fiscal 2025, compared with 0.7% last fiscal.That said, Q2 is expected to see some uptick in CAD (owing to subdued goods exports and an increase in imports, and a rise in gems and jewellery and core imports). In addition, the impact of geopolitical issues will continue to remain a monitorable.
Key data points for the first quarter
Current account deficit was 1.1% of GDP, compared with a deficit of 1% in the first quarter of fiscal 2024
Trade deficit rose to 2.7% of GDP from 2.5% in Q1 fiscal 2024 due to an increase in merchandise trade deficit to 7% of GDP from 6.6% previously, even as services trade surplus increased to 4.3% from 4.1%
Primary income account deficit (1.2% of GDP) was in line with Q1 fiscal 2024. Meanwhile, secondary income account surplus rose marginally to 2.8% from 2.7%
Net financial inflows were at 1% of GDP, compared with 1.1% in the first quarter of fiscal 2024
Accretion to forex reserves fell to $5.2 billion from $24.4 billion in Q1 fiscal 2024 and $30.8 billion in Q4 fiscal 2024
