India’s Current Account Deficit Narrows to $2.4 Billion in Q1 FY26

India’s current account deficit narrowed to $2.4 billion (0.2% of GDP) in the April-June quarter of FY26, driven by a surge in services exports and remittances, despite a widening merchandise trade gap. The deficit was narrower than the $8.6 billion shortfall recorded in the same quarter last year, but a sharp reversal from the $13.5 billion surplus in the previous quarter.

Merchandise Trade Gap Widens

The merchandise trade gap widened to $68.5 billion in Q1 FY26 from $63.8 billion in the same quarter last year, due to a sharper rise in imports than exports. However, this was partly offset by buoyant services exports, which rose to $47.9 billion from $39.7 billion, led by IT and business services. Remittances also added further support, climbing to $33.2 billion from $28.6 billion.

Financial Account

On the financial account, FDI inflows slowed to $5.7 billion from $6.2 billion, while portfolio flows strengthened to $1.6 billion from $0.9 billion. External borrowings increased to $3.7 billion, against $1.6 billion a year earlier, but NRI deposits softened to $3.6 billion from $4 billion. Overall, the balance of payments showed a surplus of $4.5 billion, compared with $5.2 billion in the same quarter last year.

Risks Mounting

Risks, however, are mounting. Higher tariffs threaten labour-intensive exports, and the current account deficit could widen to 1.2-1.3% of GDP in FY26. The central bank’s reduced forward book may weigh on the capital account, adding pressure on the rupee, which analysts expect to trade in a band of 87.50-89 per dollar in the near term.

Impact on Indian Economy

The widening merchandise trade gap and slowing FDI inflows could have a negative impact on the Indian economy, particularly on the manufacturing sector. However, the surge in services exports and remittances is expected to provide some support to the economy. The government’s efforts to boost exports and attract foreign investment are also expected to have a positive impact on the economy in the long term.

What Investors Need to Know

Investors need to keep a close eye on the current account deficit and its impact on the Indian economy. A widening deficit could lead to a depreciation of the rupee, making imports more expensive and potentially inflationary. On the other hand, a narrowing deficit could lead to an appreciation of the rupee, making exports more competitive. Investors should also keep an eye on the government’s policies and initiatives to boost exports and attract foreign investment, as these could have a positive impact on the economy and the stock market.

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