India’s current account recorded a deficit of 1.2% of GDP in Q2FY25, compared to 1.1% in the previous quarter and 1.3% in Q2FY24. The higher merchandise trade deficit was offset by an improvement in the services surplus and an increase in remittances.

The merchandise trade deficit widened in Q2FY25 due to higher core (primarily electronics and metals) and valuables (higher gold imports) deficits. Meanwhile, the services surplus improved due to higher software and business exports.

The capital account surplus rose to US$31 bn in Q2FY25, up from US$15 bn in the previous quarter and US$13 bn in Q2FY24. This increase was driven by higher foreign portfolio investment inflows, which more than offset the net outflows in foreign direct investment.

Overall, the Balance of Payments (BoP) surplus increased to US$18.6 bn from US$5.2 bn in the previous quarter. Forex reserves, however, increased by US$53.8 bn in Q2 due to a US$35.1 bn valuation gain during the quarter.

The current account deficit is expected to be around 1.1% of GDP in FY25. We expect the RBI to limit excessive volatility in the INR and permit a gradual depreciation.

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