India set for first current account surplus in 10 quarters by Q4FY24: Ind-Ra

India Ratings and Research (Ind-Ra) projects that India's current account balance (CAB) will achieve a surplus of approximately USD 6 billion (0.6 per cent of GDP) in the fourth quarter of the fiscal year 2024 (Q4FY24).

This marks the first surplus since the first quarter of fiscal year 2022 (1QFY22), a significant turnaround from the previous quarter's deficit of USD 10.5 billion (1.2 per cent of GDP).

Despite this positive quarter, the overall CAB for FY24 is expected to remain in deficit at 0.6 per cent of GDP, the lowest since FY17, excluding the pandemic-affected FY21.

The global economic environment, though still uncertain, is showing signs of improvement for 2024. Easing inflationary pressures and robust economic growth in the US and several emerging markets contribute to a brighter outlook.

The global manufacturing Purchasing Managers' Index (PMI) has been expanding for three consecutive months, reaching 50.3 in April 2024, with consistent growth in the US and emerging economies, except for the European region.

Ind-Ra forecasts a sharp increase in merchandise exports to about USD 112 billion in 1QFY25, an 8 per cent year-on-year (YoY) rise, the fastest in seven quarters, partly due to a favorable base effect.

Merchandise imports are expected to reach USD 169 billion in the same period, up 6 per cent YoY, resulting in a goods trade deficit of USD 57 billion.

Services exports, although resilient, are anticipated to see slower growth due to a high base effect and weakening demand in IT/ITES, with a services trade surplus increasing by 6.5 per cent YoY to USD 38 billion.

Consequently, the CAB is expected to register a marginal deficit in 1QFY25.

Merchandise exports grew by 4.9 per cent YoY in 4QFY24, reaching a seven-quarter high of USD 120.4 billion, driven by steady demand from the US, UAE, and the Netherlands.

Significant growth was noted in sectors such as telecom instruments, aircraft and spacecraft parts, chemicals, drug formulations, and jewelry, with volume growth ranging from 2.0 per cent to 66.9 per cent YoY and value growth between 11.7 per cent and 407.9 per cent YoY.

Merchandise imports saw a modest 2.0 per cent YoY increase in 4QFY24, driven primarily by a 21.2 per cent YoY rise in consumer durable goods imports, the highest in six quarters.

Imports of infrastructure and intermediate goods also contributed to this growth. However, imports decreased sequentially to USD 170.7 billion from USD 174.4 billion in the previous quarter.

Notable growth was observed in imports of gold, silver, electronics components, and medical instruments, with value growth ranging from 4.2 per cent to 1,432.0 per cent YoY.

The Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) indicate a widening gap since FY21, with NEER declining and REER remaining flat.

This divergence suggests increasing inflation differentials between India and its trading partners, eroding India's export competitiveness.

Sectors with low entry barriers such as agriculture, textiles, and base metals have been particularly affected, with export growth significantly lagging behind the overall goods exports CAGR of 14.4 per cent during FY21-FY24.

The persistent depreciation of the Indian Rupee (INR) as reflected in NEER, and the flat REER, indicate that inflationary pressures are impacting India's trade dynamics, potentially challenging its long-term export growth in several key sectors.