India's current account gap widens to 9-year high

India's current account deficit widened in the July-September quarter as high commodity prices and a weak rupee increased the country's trade gap, data from the Reserve Bank of India (RBI) showed. In absolute terms, the current account deficit (CAD) was $36.40 billion in the second quarter of fiscal year 2022/23, its highest in more than a decade. As a percentage of GDP, it was 4.4%, its highest since the June quarter of 2013.

The CAD was $18.2 billion, or 2.2% of GDP, in the preceding April-June quarter, while the deficit was $9.7 billion, or 1.3% of GDP, in the same quarter a year earlier, the release showed. In a statement, the RBI linked the widening deficit to the increase of "the merchandise trade deficit to $83.5 billion from $63.0 billion in Q1 2022/23 and an increase in net outgo under investment income".

In its Financial Stability Report released after the data, it said the widened trade deficit reflected "the impact of slowing global demand on exports, even as growth in services exports and remittances remained robust". The median forecast of 18 economists in a Dec. 5-14 Reuters poll was for a $35.5 billion CAD in the JulySeptember quarter. The RBI said services exports reported growth of 30.2% on a yearon-year (y-o-y) basis, driven by exports of software, business and travel services, while net services receipts increased sequentially and y-o-y.

Private transfer receipts, mainly representing remittances by Indians employed overseas, rose by 29.7% to $27.4 billion from a year earlier. The country's balance of payments recorded a deficit of $30.4 billion compared to a $31.2 billion surplus in the same quarter a year earlier. Aditi Gupta, economist with Bank of Baroda, said the CAD had probably peaked but risks remained. "Slowing global growth entails both merchandise as well as services exports will remain muted," she said.

Steady net inflows of foreign direct investment and the resumption of portfolio flows since July 2022 indicate the CAD will be comfortably financed, the RBI said in the Financial Stability Report. Madhavi Arora, lead economist at Emkay Global Financial Services said net investment income will continue to weigh given higher interest rates abroad and forecast CAD at 3.4% of GDP for the full year 2022/23.

India's Supreme Court on Monday upheld the legality of the government decision in 2016 to demonetise 86% of the country's cash in circulation, saying the decision was taken in consultation with the central bank and followed due process. A five-judge bench of the country's top court passed the verdict by a majority on a batch of petitions questioning the move. One out of the five judges wrote a dissenting opinion.

"The…notification dated 8th November 2016 does not suffer from any flaws in the decision-making process," Justice B R Gavai, one of the four judges who agreed on the decision, said in a written opinion. The petitioners included lawyers, a political party, co-operative banks and individuals.

India's former finance minister, P Chidambaram was among the lawyers who argued against the note ban measure. In November, 2016, Prime Minister Narendra Modi personally led the shock move to outlaw 86% of the cash in circulation to target undeclared "black money" and fight corruption.

But the move, widely known as demonetisation, badly hurt India's cash-dependent economy. Hundreds of thousands of people lined up outside banks for days to exchange their cash savings for legal tender.

Despite the chaos caused, many people supported demonetisation after Modi framed the decision as a fight for the poor against the corrupt rich.

Some of the petitioners had argued that the recommendation to ban or declare any series of banknotes invalid should have come from the Reserve Bank of India and not from the government.