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India current account gap seen smaller on narrower trade deficit, record service surplus

India’s narrowing merchandise trade deficit and widening service trade surplus have prompted some economists to lower their estimates for the country’s current account gap for the current and next fiscal years.

India’s merchandise trade deficit dropped to a 12-month low of $17.7 billion in January, while the services trade surplus rose to an all-time high of $16.5 billion last month, government data released on Wednesday showed.

The sizeable decline in the trade deficit was fuelled by a 15.8% month-on-month slump in imports, mainly of oil, while overall exports dropped 13.4% on-month, continued to be weighed down by tepid global demand.

On the other hand, it was robust exports that helped the service surplus scale a new high.

The combination of falling goods deficit and the rising services surplus bodes well for current account dynamics, Rahul Bajoria, Barclays chief India economist, said in a note.

Barclays lowered its current account deficit (CAD) forecast to $95 billion, or 2.8% of GDP, for the current fiscal year that ends in March, from $105 billion, or 3.1% of GDP, earlier.

Its CAD estimate for the next fiscal year is now pegged at $85 billion, or 2.3% of GDP, compared with $95 billion, or 2.6% of GDP, previously.

Madhavi Arora, lead economist at Emkay Global Financial Services, pointed out that the trade deficit in January was also much lower than the average of $25.5 billion for the second half of 2022.

So, “CAD should ease from hereon, led by incrementally improving trade deficit,” Arora said.

Emkay now expects CAD of 2.6% of GDP for the current fiscal year, versus a prior estimate of 3.1%, and of about 2.2% of GDP next fiscal, versus 2.6% earlier, Arora said.

IDFC Bank would also have to revise its forecasts, said economist Gaura Sen Gupta, after the January trade deficit came in well below the bank’s estimate of $22 billion.

“Now with the January deficit much lower and assuming February and March will average around $19 billion, there is a clear downside to our projections.”

“Our previous estimate was 3% for the current fiscal year, and now it is likely to be nearer to 2.4% or 2.5%,” Sen Gupta said.

However, she reckons that the revised CAD forecast was unlikely to change the narrative for the rupee’s depreciation against the U.S. dollar.

The recent string of robust U.S. data has bolstered bets that the Federal Reserve will hike interest rates at least two more times and will keep rates higher for longer, she said.

“This would mean that capital flows will continue to remain weak.”
Source: Reuters (Reporting by Nimesh Vora; Editing by Savio D’Souza)

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