Why did the trade deficit narrow in March 2024?

The trade deficit narrowed due to a major drop in net import of goods and a slight decline in export of services, bringing it to $8 bn. This reflects reduced demand for Indian goods and stable IT services exports despite a slowdown in US tech spending.

What role did remittances play in the current account surplus?

Remittances, which hit $107bn for the year, acted as a strong inflow, contributing significantly to the current account surplus. India receives the most remittances globally, which helped offset trade deficits and support the surplus.

Why is the RBI buying dollars despite the current account surplus?

The RBI is buying $30 bn to keep the rupee at 83 levels, preventing appreciation that could hurt export competitiveness. This strategy aims to manage inflows from FPIs into equities and bond indexes while maintaining stability.

India turns back to a current account surplus in Mar 2024

25 Jun 2024Deepak Shenoy2 min read

Quick Facts

Why did the trade deficit narrow in March 2024?: The trade deficit narrowed due to a major drop in net import of goods and a slight decline in export of services, bringing it to $8 bn. This reflects reduced demand for Indian goods and stable IT services exports despite a slowdown in US tech spending.
What role did remittances play in the current account surplus?: Remittances, which hit $107bn for the year, acted as a strong inflow, contributing significantly to the current account surplus. India receives the most remittances globally, which helped offset trade deficits and support the surplus.
Why is the RBI buying dollars despite the current account surplus?: The RBI is buying $30 bn to keep the rupee at 83 levels, preventing appreciation that could hurt export competitiveness. This strategy aims to manage inflows from FPIs into equities and bond indexes while maintaining stability.

After 2021, we’ve seen the first quarter when India’s current account turned a surplus for the quarter. This has been very interesting as the deficit was very low in the last few quarters.

Gold is a big portion of the current account. In my view, it’s a financial investment mostly so we should remove it from the current account. If you do that, we’ve been having five consecutive quarters of a surplus 🙂

Massive: The Trade Deficit Narrows

We’ve seen a major drop in net import of goods, and a slight drop in export of services, in the March quarter. That has brought the trade deficit to just $8 bn. Remember India imports goods (a trade deficit) and exports services (IT services).

There’s a bit of a slowdown in IT exports. This is probably related to a drop in US tech spending and some of the impact of reorganization as interest rates rise in the US and AI provides a bit of a cushion.

Remittances: Still Strong

Indians abroad send back money to their families and that continues to remain a strong inflow, hitting $107bn for the year. (India gets the most in the world).

Investment flows: FDI still weak, FPIs continue

FDI remains weak on a net bases, barely at $2bn. This is probably going to be negative as companies like Hyundai and a few other MNCs sell their shares in India.FPI though, saw a $11bn net investment in the quarter into both stocks and bonds.

Keeping the surplus up

While the surplus is a bit of a surprise, it’s also natural as the world contracts in trade and investment flows remain strong. Remittances have massively swept inflows into India.

The RBI has bought some $30 bn in the quarter just to retain the rupee at the 83 levels. They don’t seem to want the rupee to appreciate, but it’s probably the only way ahead considering future inflows from FPIs into equities and into bond indexes.

Meanwhile, as India migrates away from crude oil based products slowly, we will see the trade deficit remain shallow. Let’s hope for two things:

Hope the RBI allows the rupee to appreciate back to below 80, and

Hope the surplus situation continues on the current account

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