India’s current account deficit (CAD) narrowed sharply in the April–June quarter of FY26, falling to $2.4 billion, or 0.2% of GDP, from $8.6 billion (0.9% of GDP) a year earlier, according to the Reserve Bank of India. The improvement is notable, though it contrasts with the surplus of $13.5 billion (1.3% of GDP) recorded in the preceding quarter. The headline number remains a deficit, underlining persistent external imbalances despite the narrower gap. Yet, the widening trade gap and tariff shocks from the US highlight persistent vulnerabilities. The challenge for policymakers is to keep the deficit moderate while building export competitiveness and diversifying markets.
The sharper-than-expected fall was led by a surge in personal transfer receipts, largely remittances from Indians abroad. These rose 18% year-on-year to $33.2 billion in Q1 FY26, from $28.6 billion a year earlier. Remittances cushioned the current account deficit at a time when tariff shocks cloud the export outlook. Net services receipts also strengthened, rising to $47.9 billion from $39.7 billion, reflecting India’s edge in software and business services. Together, remittances and services provided the buffer against trade-related pressures.
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Goods trade remains the weak link
The merchandise trade deficit widened to $68.5 billion in Q1 FY26, up from $63.8 billion a year earlier. July alone recorded a deficit of $27.35 billion, sharply higher than June’s $18.7 billion. The widening reflects strong domestic demand alongside weaker export performance.
The US tariff war has deepened the pressure: 50–60% of India’s $87 billion merchandise exports to the US in FY25 are at risk. Petroleum products and gems are particularly vulnerable. Analysts expect merchandise exports to decline by around 3% in FY26, pushing CAD modestly above 1% of GDP.
Financial flows and forex reserves
On the financial account, external commercial borrowings rose to $3.7 billion in Q1 FY26, compared to $1.6 billion a year earlier. FDI inflows slipped to $5.7 billion from $6.2 billion, while foreign portfolio investment improved to $1.6 billion from $0.9 billion. Non-resident deposits moderated slightly to $3.6 billion from $4 billion.
India’s foreign exchange reserves rose by $4.5 billion on a balance-of-payments basis, slightly below the $5.2 billion accretion a year earlier. The build-up, along with services exports and remittances, strengthens the external cushion against volatility.
Policy challenges ahead
The CAD, while moderate by global standards, remains vulnerable to global shocks. The RBI has stepped in to manage rupee volatility, allowing near-term buy-sell swaps to mature and thereby reducing its forward book. The adjustment has put depreciation pressure on the rupee, which now trades in a range of 87.50–89 to the dollar.
Analysts argue that the current account deficit outlook is not alarming, as deficits slightly above 1% of GDP remain sustainable. Still, the risks from tariffs and global slowdown cannot be ignored. Policymakers must focus on boosting export competitiveness, diversifying markets beyond the US, and sustaining long-term capital inflows.
At the same time, policymakers cannot afford to rely indefinitely on remittances and IT-led services as shock absorbers. Both are exposed to external risks. A slowdown in either would leave the current account far more exposed to merchandise trade weakness. Moving up the manufacturing value chain, scaling high-tech exports, and forging deeper trade partnerships with emerging markets in Africa, Latin America, and Southeast Asia may be a better option instead.
Despite the projected increase in current account deficit, India’s fundamentals remain resilient. Strong domestic demand, buoyant remittances, and robust services exports offset weaknesses in merchandise trade. The challenge is to keep CAD within manageable levels while using the current window to strengthen export capacity and deepen integration with alternative markets.
The combination of RBI vigilance and structural reforms will determine whether India can navigate external turbulence without letting the current account deficit become a drag on growth.