Balance-of-payments data released by the Reserve Bank of India (the central bank) on March 31st showed that India’s current-account deficit narrowed to US$18.2bn (equivalent to 2.2% of GDP) in October-December 2022, from US$30.8bn (3.7% of GDP) in the previous quarter.

A widening current-account position would have increased depreciatory pressure on the rupee, making imports costlier and adding to domestic price pressures. The latest development bodes well for the trajectory of the rupee: US dollar exchange rate in the months ahead. The current-account deficit in the fourth quarter was smaller than EIU had anticipated and reflected the positive impact of a narrowing deficit on the goods account, as well as a widening of the surplus on the services account. We expect these trends to remain largely in place in 2023, easing some of the depreciatory pressure on the rupee. 

Improvements in the goods trade balance in October-December 2022 stemmed from a decline in imports amid a softening of global energy and commodity prices. Services exports continued to record solid double-digit year-on-year growth, albeit at a modestly slower pace compared with the third quarter, driven by information technology (IT), transport and travel services exports. We forecast services exports to remain strong in 2023, although the collapse of Silicon Valley Bank (SVB), a mid-sized US bank that was a major partner for IT companies operating in the India‑US market, will add to the headwinds facing exports in India’s bellwether IT services sector in the near term.

Looking ahead, we expect India’s international investment position to improve. Foreign portfolio investment inflows will slow considerably over the first half of 2023, following allegations of financial misconduct levied against the Adani Group, one of India’s foremost conglomerates, in January. However, direct investment inflows are expected to be less affected, given the government’s continued focus on regulatory reform and overall improvement in the business environment. The pace of increase will be constrained by tighter monetary policy settings across all of the world’s major economies.

Despite headwinds in the services sector, the overall outlook for India’s external sector in 2023 remains broadly positive. An anticipated easing of global commodity prices and a slower depreciation of the rupee will ease pressure on the import bill, contributing to a narrowing of the goods trade deficit. Although growth in workers’ remittance inflows will slow, owing to an anticipated slowdown in global growth this year, these receipts will remain strong, given more positive growth prospects in the Gulf Co‑operation Council (GCC) countries in 2023‑24. 

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.