India’s external accounts deteriorated modestly, although less than expected. Data released by the Reserve Bank of India (RBI) showed that the current account deficit (CAD) widened to $13.2 billion, or 1.3% of GDP, in the December quarter of FY26 from $11.3 billion (1.1% of GDP) in the previous year.The decline was largely driven by merchandise trade, as exports to the United States weakened and the trade deficit widened to $93.6 billion from $79.3 billion.Services continued to provide support. Net services revenues rose to $57.5 billion from $51.2 billion, supported by computer and business services exports. Primary income outflows, mostly investment income payments, shrank to $12.2 billion from $16.4 billion.
Remittances remained resilient, with personal remittance revenue rising to $36.9 billion from $35.1 billion.The annual picture so far is more positive than the quarterly figures suggest. From April to December 2025, the Canadian dollar fell to $30.1 billion (1% of GDP), down from $36.6 billion (1.3% of GDP) the previous year.Capital flows were mixed. Net foreign direct investment recorded outflows of $3.7 billion in the quarter, a slight increase from the previous year.
Foreign portfolio investment (FPI) saw a net marginal outflow of $0.2 billion, significantly lower than the $11.4 billion withdrawn in the same quarter last year.Non-resident deposits brought in $5.1 billion, up from $3.1 billion, while foreign commercial loans fell to $3.3 billion from $4.4 billion. Foreign exchange reserves fell by $24.4 billion on a balance of payments basis, less than the $37.7 billion depletion a year ago.Economists disagree about expectations. A $20 billion appreciation of the Canadian dollar, driven by higher oil prices, could push the balance of payments back to a $20 billion deficit in FY27, renewing rupee depreciation pressure if capital flows remain weak, says Deutsche Bank’s Kaushik Das. However, he maintains the year-end target for the US dollar against the Indian rupee at 90, noting that the trade-weighted real effective exchange rate for the 40 currencies is 94.7 and that geopolitical tensions may ease.
With foreign exchange reserves of $724 billion, the Reserve Bank of India has the space to curb excessive volatility.“From a deficit of $10.9 billion in Q2. As of today’s printing, the balance of payments for FY25-26 (April-December) stands at a deficit of $30.8 billion. We expect moderation in Q4 (due to a seasonally favorable current account balance) to result in a full-year balance of payments deficit of $20 billion in FY25-26,” said Astha Godhwani, economist at Barclays.
