India’s external account had been relatively stable over the past year, despite the US’ tariff offensive and foreign portfolio outflows. This, however, could worsen if the US-Israel-Iran war drags on, essentially on account of the country’s import dependence to meet crude oil demand. The current account deficit (CAD) for the April to December 2025 period was $30.1 billion, which is about 1 per cent of GDP. This is an improvement from the $36.6 billion or 1.3 per cent of GDP in the same period of FY25. The CAD has remained in control, despite capital outflows and a rising merchandise trade deficit, thanks to services exports. Rising oil imports could alter this fragile equilibrium.
The trade deficit in petroleum, oil and lubricants products already accounts for a significant 37 per cent of the total deficit in goods trade. According to estimates by economists, a $10 increase in crude oil price per barrel can expand India’s CAD as a percentage of GDP by 30-40 basis points. The CAD had spiked to record highs during the previous Gulf wars in 1990s and in 2003.
Meanwhile, goods trade deficit increased 10 per cent to $251 billion between April and December 2025, partially due to disruptions caused to commodity exports on account of the tariffs. While the bilateral trade deals signed with the EU, the UK and the US may help in bridging this gap in non-oil goods, crude oil prices will likely end up widening the deficit. Capital account flows, too, could take an adverse turn. During geopolitical crises, global portfolio investors sell risky assets such as emerging market equities and move funds into safe havens such as gold. After being net buyers of Indian equity and debt in February, foreign portfolio investors have already pulled out ₹20,819 crore from Indian markets in the first week of March. Similarly, NRI deposits, which had already declined 16 per cent in the first three quarters of this fiscal year due to weakness in the rupee, can take a knock. About 40 per cent of inward remittances come from countries in West Asia such as the UAE, Saudi Arabia, Kuwait and Qatar. Foreign direct investment from this region can also be impacted as these countries rebuild their facilities.
Services exports have been a silver lining, mitigating the impact of a widening goods trade deficit. These exports amounted to $156 billion between April and December 2025, registering a growth of 15 per cent over the same period in FY25. With over 85 per cent of these channelled to the US, the UK and Europe, these exports may remain unaffected by the ongoing war — unless the conflict carries on, hurting IT services demand globally. The resilience displayed by services exports in times of crises is notable. Policy support to exports in segments such as accounting, technical and legal consultancy, is worth considering. With forex reserves at $728 billion, Reserve Bank of India can surely defend the currency. The situation is stressful, but manageable.
Published on March 8, 2026