Current Account Deficit Expands to $13.2 Billion in Third Quarter

India’s external accounts have shown a modest deterioration, with the current account deficit (CAD) widening to $13.2 billion, or 1.3% of GDP, in the December quarter of FY26. This marks an increase from $11.3 billion, or 1.1% of GDP, during the same period last year. The widening deficit is primarily attributed to a decline in merchandise exports, particularly to the United States, which contributed to an expanded trade deficit. However, the services sector continues to provide a buffer, with net services receipts increasing significantly.

Current Account Deficit Analysis

The recent data from the Reserve Bank of India (RBI) indicates that the current account deficit has been influenced heavily by the merchandise trade sector. Exports to the US have weakened, leading to a trade deficit that grew to $93.6 billion, up from $79.3 billion a year earlier. Despite this, the services sector has shown resilience, with net services receipts rising to $57.5 billion, compared to $51.2 billion in the previous year. This growth is largely driven by exports in computer and business services. Additionally, outflows under the primary income account, which includes investment income payments, have narrowed to $12.2 billion from $16.4 billion, suggesting a slight improvement in this area.

Year-to-Date Performance

Looking at the year-to-date figures, the overall picture appears more favorable than the quarterly data suggests. For the period from April to December 2025, the CAD moderated to $30.1 billion, or 1% of GDP, down from $36.6 billion, or 1.3% of GDP, during the same timeframe last year. This indicates a positive trend in the external accounts, despite the challenges faced in the last quarter. The mixed capital flows also reflect a complex financial landscape, with net foreign direct investment (FDI) showing an outflow of $3.7 billion, slightly higher than the previous year, while foreign portfolio investment (FPI) experienced a marginal net outflow of $0.2 billion.

Capital Flows and Foreign Reserves

The capital flows present a mixed scenario for India’s economy. Non-resident deposits have increased to $5.1 billion, up from $3.1 billion, indicating a growing confidence among overseas Indians. However, external commercial borrowings have moderated to $3.3 billion from $4.4 billion. The foreign-exchange reserves have decreased by $24.4 billion on a balance-of-payments basis, which is less than the $37.7 billion depletion recorded a year ago. Economists have differing views on the future outlook, with some warning that rising oil prices could lead to a significant increase in the CAD, potentially impacting the balance of payments and putting pressure on the Indian rupee.

Economic Outlook and Expert Opinions

Economists are divided regarding the future trajectory of India’s external accounts. Kaushik Das from Deutsche Bank has expressed concerns that a $20 billion increase in the CAD, driven by higher oil prices, could lead to a $20 billion deficit in the balance of payments for FY27. This scenario could renew depreciation pressures on the rupee if capital inflows remain weak. Despite these concerns, Das maintains a year-end USD/INR target of 90, citing the current trade-weighted real effective exchange rate and potential easing of geopolitical tensions. Astha Gudwani from Barclays also provided insights, noting that the current account balance is expected to improve in the fourth quarter, leading to a projected full-year balance of payments deficit of $20 billion for FY25-26.

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