Outlook 2025: India's Current Account Deficit To Go Up? See Industry Body Projection

India's current account deficit (CAD) is to remain in a safe zone at approximately 1 per cent of GDP for fiscal 2025, up from 0.7 per cent in the previous year, according to a report by CRISIL.

Why Is CAD Going Up?

While geopolitical risks will require close monitoring, the strong financial inflows, and a steady services trade surplus are expected to provide stability.

India's current account deficit (CAD) remained largely stable at USD 11.2 billion, or 1.2 per cent of GDP, in the second quarter (Q2) of fiscal 2025, compared with USD 11.3 billion (1.3 per cent of GDP) in the same period last year. 
However, sequentially, the CAD widened slightly from USD 10.2 billion (1.1 per cent of GDP) in the first quarter, as reported by the Reserve Bank of India.

Despite pressures from a rising merchandise trade deficit, strong services exports and healthy remittances helped keep the CAD manageable. 

The overall trade deficit rose to 3.4 per cent of GDP in Q2 FY2025 from 2.9 per cent in the year-ago period, with the merchandise trade deficit increasing to 8.2 per cent of GDP from 7.5 per cent. Meanwhile, the services trade surplus rose to 4.9 per cent from 4.7 per cent.

Additionally, the primary income account deficit reduced to 1 per cent of GDP from 1.4 per cent, while the secondary income account surplus grew to 3.2 per cent from 2.9 per cent.

Financial inflows saw significant growth during the quarter, led by robust foreign portfolio investments (FPI). Net FPI inflows surged to USD 19.9 billion, up from USD 4.9 billion in the same period last year. This included equity inflows of USD 10.7 billion and debt inflows of USD 9.1 billion.

Other investments, including non-resident Indian (NRI) deposits and external commercial borrowings (ECBs), also increased sharply. NRI deposits rose to USD 6.2 billion, compared to USD 3.2 billion a year ago, while net ECBs improved to USD 5 billion from an outflow of USD 1.9 billion in Q2 FY2024.

Net foreign direct investment (FDI), however, recorded outflows of USD 2.2 billion, nearly tripling from USD 0.8 billion in Q2 FY2024, due to higher FDI outflows of USD 23.5 billion.

India's forex reserves saw an accretion of USD 18.6 billion during the quarter, a significant increase from USD 2.5 billion in Q2 FY2024. However, the rupee depreciated to 83.8 per dollar in Q2 FY2025, compared to 82.7 per dollar in the same period last year.

Since then, forex reserves have declined, falling to USD 644.4 billion by December 20, 2024, from USD 692.3 billion at the end of Q2, as the Reserve Bank of India intervened to manage rupee volatility.