Chennai: The Middle East crisis is likely to increase the import bill, while the exports would remain affected, resulting in widening trade deficit and current account deficit. However, services trade surplus will help CAD remain manageable.
India’s current account deficit (CAD) widened to $13.2 billion in the third quarter of FY26 from $11.3 billion in the same quarter of the previous year – 1.3 per cent of GDP against 1.1 per cent in the same quarter of last year. However, it narrowed from $14.1 billion in the previous quarter, finds Crisil.
The widening of the CAD in the December-end quarter was because of a worsening goods trade deficit to $93.6 billion from $79.3 billion in the same quarter last fiscal. Further deterioration in the CAD was capped on account of services trade surplus rising to $57.5 billion from $51.2 billion.
But on a cumulative basis, India’s CAD so far in FY26 till the third quarter, stands at $30.1 billion or 1 per cent of GDP, which is a slight narrowing from $36.6 billion or 1.3 per cent of GDP in the same period of FY25. While the goods trade deficit widened, it was offset by an increased surplus in services trade.
For FY27, Crisl projects the CAD to widen to 1.2 per cent of GDP as against a projected 0.8 per cent of GDP in FY26. Geopolitical uncertainties and subdued growth in global trade are likely to weigh on exports despite some relief from reduced US tariffs.
Imports face a significant upside risk, given sustained higher crude oil prices in case of prolonged uncertainty in the Middle East. Hence, together, these may weigh on the goods trade deficit. However, a healthy services trade surplus should keep the CAD manageable.
While net foreign portfolio and other investment outflows were considerably lower in the third quarter of this fiscal against the same quarter last fiscal year, outflows picked up in the case of foreign direct investment.
Meanwhile, India’s foreign exchange reserves declined $24.4 billion during the third quarter compared to $37.7 billion in the year ago period. Consequently, the country’s forex reserves stood at $696.6 billion as on December 26, 2025, down from $700.2 billion as of September 26, 2025. As of February 20, 2026, though, the forex reserves increased to $723.6 billion.
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