India’s current account deficit is estimated to cool down to 1.5 per cent of GDP in 2023-24 from 2 per cent in 2022-23. But analysts are wary of a shrinking US money supply and its impact on financing the deficit.

“A strong service trade surplus is increasingly helping to offset a bigger proportion of the sticky goods deficit, coupled with resilient remittances. This will help arrest any sharp deterioration in the FY24 current account deficit.

“We expect the deficit to stay benign at 1.5 per cent of GDP and counting on these dynamics to spill over into FY25, with a current account gap of similar magnitude,” said Radhika Rao, executive director and senior economist, DBS Group Research, in a co-authored report with Philip Wee, senior foreign exchange strategist, DBS Group Research.

“For FY24, we expect the goods deficit to add to $257 billion, marginally slower than FY23’s $264 billion. We expect full year service trade surplus to add up to a record high of $150 billion in FY24 versus $145 billion in FY23,” the report released on Monday said.

Economists at Axis Bank estimate CAD to remain at 1-1.5 per cent of GDP over the next two years with the deficit kept in check largely on account of improvement in India’s service trade surplus.

But there is a looming concern about the shrinking US money supply (M2) growth at the rate of 3.5 per cent year on year. A growing US economy needs more money. So, the dollars available outside are getting sucked into the US.

“With elevated fiscal spending keeping nominal GDP growth strong in the US, the gap between US M2 growth and US nominal growth is the worst since World War 2,” an Axis Bank report on Monday said.

With dollar supply on the decline, deficit finance is an area of concern. The current account deficit that India can sustain is determined by the quantum of capital flows. Net FDI flow in India between April-September 2023-24 was only $4.5 billion compared with $19.60 billion a year ago.

“In 2019 India could have funded a $70-80 billion CAD. Today, it would be hard to fund $30-40 billion CAD,” said Neelkanth Mishra, chief economist, Axis Bank, and head of global research, Axis Capital.