Current Account Deficit Likely To Narrow In 2023: RBI’s January Bulletin

Macroeconomic stability is getting bolstered with inflation being brought into the tolerance band and lead indicators suggesting that the current account deficit is on course to narrow through the rest of 2022 and 2023, according to the RBI Bulletin — January 2023.

“A slowdown in growth with possibilities of recession in large swathes of the global economy has become the baseline assessment even as inflation may average well above targets. Emerging markets are appearing more resilient than in the year gone by, but their biggest risks in 2023 stem from US monetary policy and the US dollar. In India, the softening of commodity prices and other costs amidst strong revenues appears to have boosted corporate performance,” according to the RBI report.

India’s merchandise exports at $34.5 billion contracted by 12.2 per cent on y-o-y basis in December 2022, as an unfavourable base effect interacted with a negative momentum (-1.1 per cent m-o-m).

“With the merchandise trade deficit reaching an all-time high of $83.5 billion in a quarter, and a rise in net outgo from the income account, the current account deficit increased to 4.4 per cent of GDP in Q2FY23,” the State of the Economy article in the Bulletin said.

The RBI added that it is noteworthy, however, that the CAD for Q1 was revised down from 2.8 per cent to 2.2 per cent on account of downward adjustment in Customs data. Similar adjustments may impinge on the CAD for Q2FY23 as Customs data or imports are revised.

In November 2022, the government’s chief economic advisor had said the CAD for the current fiscal year was expected at around 3-3.2 per cent of GDP, which is much higher than 1.2 per cent in the previous year.

“For emerging and developing economies, the biggest risks in 2023 are US monetary policy and the US dollar. Some of them have shown remarkable resilience during 2022 in coping with global spillovers from these sources, and in calibrating monetary policy to domestic growth-stability trade-offs in a period of high inflation levels and volatility. Across the global south, however, hunger is becoming a function of prices rather than availability. In some parts of this world, debt distress will cause many countries to continue to teeter on the edge of crisis as they negotiate debt relief with bilateral lenders before a multilateral bail-out is feasible,” the RBI report said.

The IMF expects one-third of the world to be in recession in 2023. In its latest Global Economic Prospects (GEP) released on January 10, 2023, the World Bank points to a prolonged slowdown in the global economy with growth pegged at 2.2 per cent in 2023 – the third lowest in three decades.

World merchandise trade volume growth slowed to 3.2 per cent year-on-year (y-o-y) in October 2022 due to negative momentum as well as an unfavourable base effect.

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