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Informist, Saturday, Jun. 28, 2025

 

NEW DELHI – India's current account deficit is likely to widen slightly to 0.7-1.0% of GDP in the current financial year ending March from the 0.6?ficit recorded in FY25, economists said in notes following the release of India's balance of payments data Friday. India's merchandise exports are likely to fall amid a challenging trade environment caused by the tariff policies of US President Donald Trump, the notes said. 

 

The US announced sweeping tariffs for major trade partners on Apr. 2, before giving countries a 90-day window to negotiate the rates a week later. India is expected to be among the first countries to negotiate a trade deal with the US, before the window closes, and among the least impacted by the move. Despite this, merchandise exports may fall 3-5% on year in FY26 after two years of remaining at $437 billion, economists said. 

 

India's merchandise exports were up 3% on year in Apr-May at $77.19 billion. At the same time, resilient domestic demand is likely to keep imports growing, economists said. In the first month after Trump announced the tariffs, India's merchandise trade gap jumped to a five-month high of $26.42 billion in April.

 

"Global growth backdrop is far more uncertain this year on the back of geopolitical developments and trade war. This underscores the muted external demand due to uncertain trade conditions," ICICI Bank wrote in a note, forecasting a current account gap of 0.7% of GDP. "On the other hand, the relative strength of domestic economy is driving imports higher and the same is likely to continue."

 

Despite recent shocks in crude oil prices due to the conflict in West Asia, analysts said India's crude oil basket is likely to average around $65-$70 a barrel in FY26. Services exports are also likely to remain strong, unlike the contraction in goods exports seen. Economists at rating agencies ICRA and CareEdge see the current account deficit at 1.0% and 0.8% of GDP, respectively, in FY26. YES Bank also sees the deficit at 0.8% of GDP.

 

IDFC FIRST Bank retained an outlier estimate of the current account deficit at 1.5% of GDP, though economist Gaura Sen Gupta said there was a downside risk to her assessment. Forecasting a wider overall trade deficit in FY26 against FY25, Gupta noted the slowdown in US growth could dampen software exports. Remittances from the US, India's largest source, could also fall due to proposed legislation implementing a 3.5% tax on outbound remittances.

 

As is usual, the current account could see a deficit while the capital account continues to draw flows from foreign investors, with Jan-Mar likely an idiosyncratic quarter, economists said. After three quarters of deficit, India's current account posted a surplus of 1.3% of GDP in Jan-Mar, higher than analysts had estimated. However, the capital account saw two straight quarters of outflows in Oct-Mar and the net surplus for FY25 shrank to 0.4% of GDP, a 43-year low.

 

"India's current account, which is usually in deficit, posted a surplus...In contrast, the capital account, which is usually in surplus, recorded a deficit...," QuantEco said in a note. "This simultaneous role reversal is unique and unlikely to get repeated."

 

The capital account inflows are likely to lead to a small balance of payments surplus in the current fiscal year, against a deficit of $5 billion in FY25. QuantEco pegged the surplus at 0.2% of GDP, or around $10 billion, while Emkay Global Financial Services sees the surplus at $10 billion-$12 billion. DBS Bank expects balance of payments to "eke out a small surplus".

 

"For FY26, we estimate a recovery in net FDI given positive investment intentions and tailwinds from pipeline announcements," said Radhika Rao, senior economist at DBS Bank. "Portfolio flows might also receive a lift from slippery USD outlook and need for geographical diversification trades. Offshore loans are expected to moderate."  End

 

US$1 = INR 85.48

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Aaryan Khanna

Edited by Avishek Dutta

 

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