India’s current account deficit (CAD) widened to USD 13.2 billion, or 1.3% of GDP, in the October–December quarter (Q3 FY2025-26), up from USD 11.3 billion (1.1% of GDP) in the same period last year, according to fresh data released by the Reserve Bank of India on Monday.
The increase was largely driven by a higher merchandise trade deficit, reflecting weaker exports — particularly to the United States — alongside elevated import levels.
However, on a cumulative basis, India’s external position showed some improvement. The CAD moderated to USD 30.1 billion (1% of GDP) during April–December 2025, compared with USD 36.6 billion (1.3% of GDP) in the corresponding period a year ago.
In its latest “Developments in India’s Balance of Payments” report, the RBI stated:
“India’s current account deficit increased to USD 13.2 billion (1.3 per cent of GDP) in Q3:2025-26 from USD 11.3 billion (1.1 per cent of GDP) in Q3:2024-25.”
Trade Deficit Widens Sharply
The merchandise trade deficit for the December quarter stood at USD 93.6 billion — significantly higher than USD 79.3 billion recorded in the same quarter of the previous year.
The wider trade gap reflects a combination of subdued export growth and firm import demand. A slowdown in exports to key markets, including the US, contributed to the pressure.
Services Exports Provide Cushion
Offsetting part of the trade imbalance, net services receipts rose to USD 57.5 billion during the quarter, compared with USD 51.2 billion a year earlier.
According to the RBI, services exports registered annual growth across major segments, particularly computer services and other business services — sectors that continue to remain a strong pillar of India’s external sector performance.
Primary and Secondary Income Trends
Net outgo under the primary income account — largely reflecting investment income payments — declined to USD 12.2 billion from USD 16.4 billion in Q3 of the previous financial year, offering some relief to the overall current account balance.
Meanwhile, personal transfer receipts under the secondary income account — mainly remittances from Indians working overseas — increased to USD 36.9 billion in the December quarter, up from USD 35.1 billion in the year-ago period.
Remittances continue to serve as a stable and vital source of foreign exchange inflows.
FDI and FPI Flows Mixed
On the capital account front, foreign direct investment (FDI) showed a net outflow of USD 3.7 billion in Q3 FY26, higher than the USD 2.8 billion net outflow recorded in the same quarter last year.
In contrast, foreign portfolio investment (FPI) recorded a relatively modest net outflow of USD 0.2 billion, compared with a sharp USD 11.4 billion net outflow in Q3 FY25 — indicating improved investor sentiment compared to the previous year.
Non-resident Indian (NRI) deposits saw stronger inflows, rising to USD 5.1 billion from USD 3.1 billion a year earlier.
Net inflows under external commercial borrowings (ECBs) amounted to USD 3.3 billion, lower than USD 4.4 billion in the corresponding quarter of FY25.
Forex Reserves Depletion
Foreign exchange reserves declined by USD 24.4 billion (on a Balance of Payments basis) during the December quarter, compared with a depletion of USD 37.7 billion in the same period a year ago.
For the April–December 2025 period:
- Net FDI inflows rose to USD 3.0 billion, up from USD 0.6 billion in April–December 2024.
- FPI recorded net outflows of USD 4.3 billion, reversing net inflows of USD 9.4 billion in the year-ago period.
- Forex reserves depleted by USD 30.8 billion, compared to a USD 13.8 billion decline a year earlier.
Outlook: Oil Prices and Trade Data Key Risks
Looking ahead, ICRA Chief Economist Aditi Nayar cautioned that the higher-than-expected merchandise trade deficit for January 2026 could limit the typical seasonal improvement in the current account balance during Q4 FY26 — unless February and March figures show meaningful cooling.
She also highlighted the recent surge in international crude oil prices following escalating tensions in West Asia, which may increase India’s import bill in the near term.
“We currently expect the current account balance to print between -USD 1.0 billion and +USD 1 billion in Q4 FY2026,” Nayar said.
She added that India’s CAD is projected to settle at around 0.6–0.7% of GDP in FY2026 before rising to approximately 1% of GDP in FY2027, with risks tilted to the upside.
The Bigger Picture
While the December quarter saw a rise in the current account deficit due to a widening trade gap, India’s overall external position for the financial year so far remains relatively contained. Strong services exports and remittance inflows continue to provide a buffer.
However, global oil prices, export momentum, and capital flows will remain critical variables in shaping India’s external balance in the coming quarters.