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India’s 2Q current account deficit widened seasonally to 1.3% of GDP – with increased imports of valuables, electronics, and fertilisers – but was lower than 1.8% in 2QFY25. Invisibles saw rapid growth (+11% YoY) which was also broad-based (remittances, software, and others grew, offsetting primary income outflows). The concern remains financial outflows, spurred by lower global savings: a USD 26bn YoY swing in portfolio flows (outflows of 6bn vs. 20bn inflows in 2QFY25) meant FX reserves fell USD 11 bn. A rebound in nominal growth should help portfolio flows and a weak REER level is likely to damp depreciation ahead. The only risk remains speculative investments in gold.
2Q CAD rises seasonally to 1.3% of GDP, below 1.8% of 2QFY25 (Fig 2)
India 2Q CAD was higher QoQ at 1.3% of GDP, rising from the 0.3% of 1Q – driven by widening of the merchandise deficit (seasonal, with higher gold, silver and fertiliser imports, and consumption-driven electronics imports), partly offset by increased software services exports and worker remittances (also seasonal). The current account deficit of USD 12.3 bn included interest paid to RBI of USD 7.9 bn. That reserves still fell 10.9 bn, with forward shorts lower only by around 1 bn, was because of continued financial outflows. FDI was net positive but weak, and FPI outflows continued.
Growth in services exports remains robust, offsetting primary income outflows
Net Invisibles grew 11% YoY despite a 27% YoY increase in outflows of primary income (e.g., interest on foreign debt, dividends on equity). Software services exports were up 11% YoY, and remittances 12% YoY, belying the concerns on visa issues. Net services exports ex-software grew a remarkable 32% YoY. We note that services like tourism and trade-related services were weak, implying that ‘modern services’ continued to grow rapidly. Rolling 4Q net invisibles now total US$282bn, and are still growing, providing some comfort on CAD.
Mild, not wild depreciation ahead for the INR
Going by the IMFs ARA model and crawl-like arrangement classification, India reserves are low. However, recovery in nominal growth and rapid REER depreciation will likely attract flows – used to close shorts, but limiting the pace of weakening near-term.
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