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India’s CAD to Exceed 2% of GDP in Q3 FY25 Due to Surge in Gold Imports
Team Finance Saathi
28/Dec/2024
What's Covered in the Article:
- India’s CAD is forecast to rise above 2% of GDP in Q3 FY25, primarily due to increased gold imports.
- Strong services exports and remittance inflows will help limit the overall CAD for FY25.
- The Indian capital account recorded a surplus, with significant FPI inflows and NRI deposits.
India’s Current Account Deficit (CAD) is expected to rise above 2% of GDP in the third quarter of FY25, primarily driven by a surge in gold imports, according to a report by Bank of Baroda. The increase in imports of gold, rising by USD 5 billion year-on-year, has been a key factor in the widening merchandise trade deficit, which increased to USD 75.3 billion in Q2 FY25 from USD 64.5 billion in the previous year.
Despite these challenges, India’s economy has shown resilience in certain sectors. Services exports—particularly in software and business services—have strengthened, with the net services balance rising to USD 44.5 billion in Q2 FY25, up from USD 39.9 billion in the previous year. In addition, private remittances also grew to USD 29.3 billion, playing a crucial role in offsetting the increased trade deficit.
Capital Account Surplus
India’s capital account recorded a surplus of USD 11.9 billion in Q2 FY25, up from USD 10.3 billion in the previous year. A sharp rise in Foreign Portfolio Investment (FPI) inflows, which surged to USD 19.9 billion from USD 4.9 billion in FY24, has been a major contributor. Alongside this, Non-resident Indian (NRI) deposits and External Commercial Borrowings (ECBs) also helped offset the Foreign Direct Investment (FDI) outflows.
Balance of Payments Surplus
Despite the rise in CAD, India’s balance of payments (BoP) recorded a significant surplus of USD 18.6 billion in Q2 FY25, up from USD 2.5 billion in the same period last year. This surplus was primarily supported by the inflow of capital—a sign of investor confidence in India’s economy.
Impact on the Indian Rupee
The report also noted the potential pressure on the Indian rupee, which could face downward pressure due to a stronger US dollar and slower FPI inflows. The Bank of Baroda forecasts that the rupee could trade within the range of 84-85.5 USD/INR in the near term.
Concerns and Risks
While the surge in gold imports and trade deficit is seen as a one-off event, the Bank of Baroda raised concerns about the possibility of protectionist trade policies under the incoming US administration, which could further impact India’s external sector.
Despite these challenges, the overall CAD for FY25 is expected to remain manageable, with estimates of the deficit staying within a 1.2%–1.5% range of GDP, thanks to the steady growth in services exports and remittance inflows. The resilience of these sectors should continue to cushion the economic impact, helping India maintain a stable economic outlook through the year.