India’s current account deficit (CAD) remained steady at $11.2 billion, equivalent to 1.2% of the gross domestic product (GDP), for the second quarter of the financial year 2024–25 (Q2 FY25). This figure shows a marginal decrease from $11.3 billion (1.3% of GDP) in the same period last year, according to data released by the Reserve Bank of India (RBI). While the merchandise trade deficit widened, robust services exports and increased remittances helped stabilize the CAD. Additionally, the balance of payments (BoP) surplus surged to $18.6 billion, a significant rise from $2.5 billion a year ago, reflecting resilience amid global economic uncertainties.
Merchandise Trade and Services Exports Drive Stability
The merchandise trade deficit in Q2 FY25 rose to $75.3 billion from $64.5 billion in the corresponding quarter last year, highlighting a challenging global trade environment. However, this increase was offset by a surge in net services receipts, which climbed to $44.5 billion from $39.9 billion a year earlier. Key drivers included growth in computer services, business services, travel, and transportation, reflecting India’s strong global position in these sectors.
Services exports for the first half of FY25 reached $84.2 billion, a substantial increase from $75.1 billion in the same period of FY24. The sustained growth in this segment underscores the country’s expanding role in global services markets.
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Remittances and Financial Account Trends
Private transfer receipts, primarily remittances by Indians working abroad, grew to $31.9 billion from $28.1 billion in Q2 FY24, indicating strong support from the Indian diaspora. Non-resident Indian (NRI) deposits also saw robust inflows of $6.2 billion, nearly doubling the $3.2 billion recorded a year ago.
The financial account displayed mixed trends during the quarter. Net foreign direct investment (FDI) recorded an outflow of $2.2 billion, compared to $0.8 billion in the same period last year. However, foreign portfolio investment (FPI) surged, with net inflows rising sharply to $19.9 billion from $4.9 billion in Q2 FY24. External commercial borrowings also recorded net inflows of $5 billion, contrasting with outflows of $1.9 billion in the previous year.
Balance of Payments and Foreign Exchange Reserves
India’s BoP showed a robust surplus of $18.6 billion in Q2 FY25, a significant improvement from $2.5 billion in the same quarter last year. This reflects the country’s ability to weather external shocks while maintaining economic stability. Foreign exchange reserves on a BoP basis also increased substantially, providing additional confidence in India’s external financial position.
What It Means for India’s Financial Future
The stable CAD and strong BoP surplus are indicative of India’s resilience in navigating global economic challenges. The rise in services exports and remittances highlights the strength of India’s non-merchandise economy, which is increasingly driving growth and offsetting trade deficits. The surge in FPI inflows signals strong investor confidence in the Indian economy, while increased foreign exchange reserves provide a cushion against external vulnerabilities.
However, the outflow in FDI signals a need for policy interventions to attract long-term investments. Addressing challenges in the merchandise trade segment, particularly by diversifying export markets and reducing dependency on imports, will be crucial for ensuring sustained economic stability.
As India moves forward, the focus on strengthening its digital economy, enhancing global competitiveness in services, and maintaining robust macroeconomic fundamentals will play a pivotal role in shaping its financial trajectory. These factors, coupled with policy measures to bolster trade and investment, position India favorably for steady economic growth in the coming years.