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Informist, Thursday, May 29, 2025

MUMBAI – The Reserve Bank of India, in its annual report for 2024-25, said that a robust outlook for the country's services trade balance and inward remittance receipts will help the current account deficit to remain within sustainable limits in 2025-26 (Apr-Mar). The inclusion of India's sovereign bonds in global bond indices and liberalisation of foreign direct investment limits in the insurance sector should bolster foreign investment flows, the central bank said.

Nurturing an export-friendly environment in India, signing regional trade agreements, participating more in global value chains will strengthen India's external sector, RBI said in its report. The central bank also said that diversifying India's merchandise and services basket to new frontiers, coupled with leveraging international trade in rupee will help India become resilient.

The central bank said India's external sector remained resilient in 2024-25 amid prolonged geopolitical tensions, rising geoeconomic fragmentations, and heightened uncertainty related to global trade. While India's merchandise trade deficit widened in the previous financial year, strong services exports and private transfer receipts contained the current account deficit well within sustainable levels, RBI said. 

Global foreign exchange reserves went up in 2024, which reflects valuation gains due to a rise in gold prices, RBI said. Yet, India's foreign exchange reserves fell on a balance of payment basis in Apr-Dec as net capital inflows fell short of current account deficit. However, India's reserves as of Dec. 31 were over two times its short-term external debt. As of Mar. 31, these reserves provided a cover of 11 months of merchandise imports on a balance of payment basis. 

The central bank noted that India's merchandise exports increased by a paltry 0.1% on year to $437.4 billion in 2024-25, having contracted 3.1% a year ago. Growth in exports was driven by electronic goods, engineering goods, drugs and pharmaceuticals, rice and readymade garments. 

Imports grew at a much faster 6.2% to $720.2 billion in FY25, having contracted 5.3% the year ago. This sharp surge was led by imports of gold, electronic goods, petroleum, crude oil, and products. India depends on imports for fulfilling over 80% of its energy needs. Russia remained the top source for India's crude oil imports, even as the UAE's share inched up, while Iraq and Saudi Arabia's contribution moderated. Amid a markedly sharp 30% increase in gold prices, value of precious metal imports by India increased just over 27% in 2024-25 to $58 billion.

FINANCING

Capital inflows into India moderated from a year ago in Apr-Dec and fell short of the current account deficit, which led to India's forex reserves depleting by $13.8 billion on a balance of payment basis. Foreign direct investment increased nearly 14% to $81 billion in FY25. However, net flows of foreign direct investment were $400 million in the previous financial year, compared to $10.1 billion a year ago. This fall was due to higher repatriation, disinvestment and net outward foreign direct investment, RBI said. 

The services sector was a major recipient of foreign direct equity flows into India, followed by manufacturing, electricity and other energy, retail and wholesale trade, and transport. Countries such as Singapore, Mauritius, the US, the Netherlands, and the UAE contributed nearly 75% to the inflows.  

Foreign portfolio investment saw a net inflow of $1.7 billion in FY25, much lower than $41.6 billion a year ago. Equities recorded outflows of $15.7 billion in FY25 compared to inflows of $25.3 billion in FY24, similar to other emerging market economies. India's external debt-to-GDP ratio was 19.1% as on Dec. 31, compared to 18.5% as on Mar. 31 last year.

RBI noted that global economic growth, which fell to 3.3% in 2024 from 3.5% in 2023, is expected to moderate further in 2025, to around 2.8%. The forecast for 2025 is based on the International Monetary Fund's forecast in the April edition of World Economic Outlook. "Downside risks cloud the growth outlook owing to heightened trade tensions and elevated policy-induced uncertainty," RBI said. Output growth in advanced economies increased to 1.8% in 2024 from 1.7% in 2023, while emerging market and developed economies saw theirs falling to 4.3% from 4.7%. 

"Supported by sustained robust growth in services exports and private transfer receipts, current account deficit remained manageable despite a widening merchandise trade deficit," the central bank said in its report.  End

Reported by Anand JC

Edited by Deepshikha Bhardwaj

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