ICICI Bank has forecast that India's Current Account Deficit (CAD) will remain at 1.1% of GDP in FY25, primarily due to a widening trade deficit and foreign portfolio investment (FPI) outflows. According to the bank’s recent report, significant changes in the country's external position have been noted in recent months, with key contributors being a rise in the trade deficit and persistent outflows from foreign investments.

In November 2024, India’s trade deficit reached a record high of $37.8 billion, a sharp increase largely attributed to gold imports, which amounted to $14.9 billion. Additionally, non-oil and non-gold imports have been rising steadily, reflecting a 3.5% year-on-year increase in October-November 2024. On the export front, while oil exports saw a significant drop of 36% during the same period, non-oil exports showed promising growth. Electronics exports surged by 50%, and engineering goods saw a 27% increase, offering some optimism amidst the trade challenges.

Despite the government’s efforts to control gold imports, the trade deficit is expected to remain under pressure due to global economic conditions. The weaker global growth outlook, coupled with rising interest rates, particularly from the United States Federal Reserve, is a key factor contributing to the overall trade imbalance. The ICICI Bank report emphasized that the trade deficit could worsen in the coming months, particularly given the uncertain global economic environment.

The report also highlighted the contrast between Foreign Direct Investment (FDI) inflows and Foreign Portfolio Investment (FPI) outflows. While FDI has remained strong, particularly in sectors like technology and infrastructure, FPI outflows, driven by exits in India’s primary equity markets, have somewhat offset the gains from FDI. This shift has resulted in a more precarious Balance of Payments (BoP) situation for the country.

The first half of FY25 saw a BoP surplus of $23.8 billion, but the second half is now witnessing a sharp decline. The overall BoP surplus is expected to remain neutral for the year, with risks of turning negative if FPI outflows continue to exceed expectations. ICICI Bank’s forecast underscores the challenges India faces in maintaining a balanced external account amidst global uncertainties and domestic trade pressures.

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