India's current account deficit to widen to 5% in Q2, 3.5% in FY23: Icra

India's current account deficit will widen to 5% of the GDP in the September quarter due to higher merchandise trade deficit, domestic ratings agency Icra said

India's current account deficit (CAD) will widen to 5 per cent of the GDP in the September quarter due to higher merchandise trade deficit, domestic ratings agency Icra said.

The trade deficit has doubled to USD 28.7 billion for August due to a 36.8 per cent expansion in imports and a 1.2 per cent decline in export earnings.

"The current account deficit (CAD) is projected to widen to an all-time high of USD 41-43 billion in Q2 FY23 from the USD 30 billion expected in Q1 FY23. It is expected to widen to 5 per cent of GDP in Q2 FY23, the second highest level since Q3FY12," it said in a note.

For the first two months of the quarter, the monthly average trade deficit has trended higher at USD 29.3 billion as against USD 23.5 billion in the June quarter, driven by strong domestic demand which led to a surge in the imports while exports remained subdued amid international slowdown fears, Icra said.

CAD will moderate to 2.7 per cent of GDP in the second half of the fiscal, benefitting from lower commodity prices and seasonally stronger exports, it said, adding that a potential recession in major economies may dampen growth in merchandise and services exports in H2 FY23 as well.

"Overall, the CAD is projected to widen to an all-time high of USD 120 billion (3.5 per cent of GDP) in FY23 from USD 38.7 billion (1.2 per cent of GDP) in FY22," the agency said, adding that the gap will be lower than the 4.8 per cent witnessed in FY13.

During the last episode of widening CAD, the domestic currency had come under intense pressure.

The agency said with the re-emergence of foreign portfolio investors (FPIs) equity inflows, it expects the rupee to trade between 78.5-81 against the US dollar in the rest of calendar year 2022 amid the global headwinds.

"While forex reserves have seen a drawdown of USD 45.4 billion in FY23 so far (till Aug 26, 2022), they remain large, and are likely to prevent a disorderly depreciation of the Indian rupee," it added.