India’s current account deficit (CAD) remained unchanged at 1.1% of GDP in Q3FY25, even as the absolute value of the deficit increased to $11.5 billion from $10.4 billion in the corresponding quarter of the previous year. Despite a rise in merchandise imports and a widening goods trade deficit, a robust services trade balance played a crucial role in keeping the overall deficit in check.
As global trade conditions evolve, India’s economy continues to balance external trade pressures with resilient export performance in both goods and services. The Reserve Bank of India (RBI) has highlighted key trends influencing India’s current account position, including higher exports, increased foreign exchange inflows, and shifts in foreign direct investment (FDI) and portfolio flows.
Merchandise Trade: Imports and Exports Show Growth Amid Economic Recovery
India’s merchandise imports recorded a 6% growth in Q3FY25, reaching $186.7 billion, reflecting higher domestic demand and rising commodity prices. At the same time, merchandise exports rose to $109 billion, narrowing the impact of rising imports on the overall trade deficit.
The goods trade deficit expanded to $79 billion in Q3FY25, compared to $72 billion in the same period last year. This widening trade gap is attributed to increased imports of essential commodities, capital goods, and energy-related products, indicating a pick-up in industrial and consumer demand.
Trade Insights:
Imports rose to $186.7 billion, reflecting increased economic activity.
Exports climbed to $109 billion, mitigating the trade deficit impact.
Goods trade deficit widened to $79 billion from $72 billion a year earlier.
Services Trade Balance: A Key Factor in Containing Deficit
India’s services sector played a crucial role in limiting the current account deficit, with net services receipts rising significantly. The RBI reported that net services earnings increased to $51.2 billion in Q3FY25, up from $45 billion in the previous year.
The growth in services exports was driven by strong performances in:
Business services
Computer and IT services
Transportation services
Travel and tourism
These sectors continue to contribute to India’s foreign exchange reserves, helping offset trade imbalances in the goods sector. The rise in global demand for Indian IT and consulting services remains a key factor in sustaining strong services exports.
Services Insights:
Net services earnings rose to $51.2 billion, up from $45 billion in Q3FY24.
IT and business services led export growth, boosting India’s forex inflows.
Travel and transportation services saw improved performance, reflecting post-pandemic recovery.
February 2025 Trade Deficit Falls to a 42-Month Low
India’s merchandise trade deficit hit a 42-month low of $14 billion in February 2025, as both exports and imports declined during the month. This dip in trade activity suggests a temporary moderation in global demand and supply chain adjustments.
The reduction in the trade deficit for February provides some relief in the face of rising external account pressures, offering the government and policymakers some breathing room in managing external balances.
February Trade Trends:
Trade deficit reduced to a 42-month low of $14 billion.
Both exports and imports declined, reflecting shifting global economic conditions.
India’s CAD Widened to $37 Billion in April-December 2024
For the broader April-December 2024 period, India’s current account deficit widened to $37 billion, or 1.3% of GDP, compared to $30.6 billion (1.1% of GDP) in April-December 2023. The primary reason for this expansion was the higher merchandise trade deficit, as imports outpaced exports.
While services exports have provided a cushion, the persistent trade deficit in goods remains a concern for policymakers, particularly amid global economic uncertainties and geopolitical risks.
CAD Trends for April-December 2024:
CAD widened to $37 billion (1.3% of GDP) from $30.6 billion (1.1% of GDP) last year.
Higher merchandise trade deficit drove the increase.
Services trade balance helped contain further widening.
Foreign Direct Investment and Portfolio Inflows: Declining Trends
India’s net foreign direct investment (FDI) inflows were lower in the April-December 2024 period, amounting to just $1.6 billion. The drop in FDI and portfolio flows reflects global investment trends, with rising interest rates in developed markets and geopolitical risks leading to cautious investor sentiment.
On the other hand, Non-Resident Indian (NRI) deposits saw an uptick, providing some support to India’s foreign exchange reserves. NRI deposits remain a key source of stable long-term capital inflows, helping mitigate short-term volatility in financial markets.
Foreign Investment Insights:
Net FDI inflows declined to $1.6 billion, reflecting global investment caution.
Portfolio inflows were subdued, amid global economic uncertainty.
NRI deposits increased, supporting India’s forex reserves.
India’s current account deficit has remained stable at 1.1% of GDP in Q3FY25, despite widening in absolute terms due to higher merchandise imports and trade deficit. A strong services sector, improved NRI deposits, and reduced trade deficit in February helped balance external pressures. However, lower FDI inflows and portfolio investments indicate potential challenges ahead, requiring policymakers to focus on export competitiveness, trade diversification, and attracting long-term capital inflows.
