Ordinarily, a CAD of above 2 per cent of GDP is not threatening. India has financed higher CADs with capital flows  | Photo Credit: Dado Ruvic

India’s current account surplus of $7.1 billion in Q4 of FY26 comes as a pleasant surprise — given the spike in crude oil prices. While the current account balance has been favourable in Q4 over the last four years, it is notable that the Q4 surplus was recorded in difficult times. Both US tariffs and the Iran war (which began in February) were factors. The surplus came about, thanks to an increase in services exports — led by computer and other business services — and, rather surprisingly, strong overseas remittances.

However, FY26 as a whole recorded a marginally higher current account deficit (CAD) of $25.2 billion, or 0.6 per cent of GDP ($23.3 billion in FY25). This increase was largely on account of the expansion in goods trade deficit by $51 billion. While US tariffs and their effects contributed to a higher goods trade deficit in FY26, rising oil prices have made matters worse this fiscal. Analysts have estimated the CAD for FY27 to be above 2 per cent of GDP. This looks plausible for various reasons. First, higher energy prices will lead to a spike in the oil import bill, unless the war ends in West Asia soon. Second, the CAD also depends on the extent to which remittances can offset a higher goods trade deficit. Finally, it is to be hoped that the newly minted FTAs, such as those with the EU and UK, do not result in higher net imports. Ordinarily, a CAD of above 2 per cent of GDP is not threatening. India has financed higher CADs with capital flows. However, the problem is that FPI equity outflows, at above ₹2.5 lakh crore so far in 2026, have overshot ₹1.6 lakh crore for all of 2025.

Debt flows, too, have been negative. Net NRI deposit inflows in FY26 were down 11 per cent at $14.4 billion. Similarly, external commercial borrowings had also ebbed 23 per cent to $14.2 billion. The recent monetary policy announced a US dollar-rupee swap facility to banks on fresh FCNR(B) deposits of three-to-five year maturity. Th central bank has also agreed to take on the hedging costs on these deposits. With most banks hiking the rates offered on FCNR(B) deposits by 200 to 400 basis points, the hope is that inflows from this route could improve. A similar swap facility is also being offered to public sector undertakings to raise ECBs from overseas. With borrowing rates likely to be lower due to the swap arrangements, PSUs could raise more ECBs until December.

Equity outflows are driven by global factors. The RBI and Centre have, therefore, rightly targeted FPIs investing in debt. FPI inflows into Indian debt through the fully accessible route has been positive in 2025 and 2026, indicating demand from global bond funds. The removal of capital gains tax on G-Secs as well as exemption of income tax on interest earnings on these bonds will help. Passive inflows through global emerging market funds can improve going ahead. FY27 may yet turn out to be a reasonably normal year on the external account front.

Published on June 14, 2026