CAD may average at 1% of GDP in FY26 despite global uncertainties

Even as India's current account deficit averages at 1 per cent of GDP in FY26, it is eminently manageable in spite of the prevailing global uncertainties.

CAD reduced to USD5.6bn as foreign flows improved. For FY25, CAD/GDP improved to 0.6 per cent of GDP on the back of strong net services, while BoP swung to USD5bn deficit due to much lower foreign flows.

In fact, CAB improved to a surplus of USD13.5bn in Q4 from a deficit of USD11.3bn in the preceding month. The sequential improvement was led by a lower goods trade deficit of USD59.5bn as exports rose 6 per cent QoQ while imports declined 7 per cent QoQ. Additionally, net invisibles also improved – with steady growth in net services exports and a sharply lower drag from net investment income, even as net remittances fell.

For entire fiscal, CAD narrowed to USD23.4bn versus USD26.1bn, despite the goods trade deficit widening to USD287bn as both—net services and transfers—saw strong growth for the year.

The capital account stayed in deficit, albeit lower, in Q4 at USD5.6bn, 0.5 per cent deficit from 2.6 per cent in Q3. The improvement was led by lower FPI outflows, while FDI flows turned positive. Banking capital and NRI deposits were stable, while net ECBs rose to USD7.9bn. Overall, Q4 BoP swung to a surplus of USD8.8bn; the basic balance, which reflects durable funding, also turned positive. For FY25, the capital account surplus substantially declined to USD15.7bn, due to much lower FDI and FPI flows. FY25 BoP moved to a mild deficit of USD5bn, with basic balance worsening to -USD22bn.

FPI flows, as per Emkay, are expected to improve in FY26, although global uncertainty will weigh on sentiment, with FDI flows also remaining patchy. BoP could move to a surplus of USD10-12bn in FY26 amid such dynamics, with overall financing needs being manageable despite a volatile external environment.

Weakening of the broad dollar continued in Q1 despite the Fed indicating a wait-and-watch stance, and was partly led by reassessment of US assets. The rupee has generally trended weaker than Asian peer currencies, which have mostly benefitted through the quarter. Indo-Pak conflict followed by conflict-led oil volatility weighed on the rupee, even when the likes of CNY—which is bearing the maximum hit of trade headlines—appreciated mildly in the quarter.

While the current account balance expectedly reported a seasonal surplus in Q4, the size of the same overshot Icra’s expectations, amid a surprise dip in primary income outflows in the quarter. This led to the unexpected narrowing in the CAD to 0.6 per cent of GDP in FY25.

Amid expectations of a widening in the merchandise trade deficit as well as a moderation in the services trade surplus in Q1 vis-à-vis Q4, it is expected that the current account may revert to a deficit in the ongoing quarter, printing at 1.3 per cent of GDP.