The worries on the current account front seem to have returned after a phase of comfort. India’s current account deficit (CAD) moderated to 1.3% of GDP in Q2FY26 from 2.2% in the year-ago quarter, but widened sequentially from 0.2% of GDP in the previous quarter, according to data released by the Reserve Bank of India on Monday.
Moreover, a relatively weaker financial account resulted in a large depletion of $10.9 billion from the foreign exchange reserves on a balance of payment basis in July-September this fiscal, as against accretion of US$ 18.6 billion in Q2FY25.
This was the largest reserves depletion after a $37 billion dwindling seen in Q3FY25. In most other recent quarters, accretion to the forex was reported.
What does this reflect?
This shows that the hit to merchandise exports from the US tariffs and FPI outflows are causing some concerns for the current and capital accounts respectively. Merchandise trade deficit in October widened to a record high of $42 billion as exports fell 11.8% in the wake of the 50% US tariffs, and expensive gold and fertiliser imports. This implies that the CAD may not be benign in the current quarter (Q3FY26).
“Looking ahead, the spike in gold imports in October 2025 is likely to bloat the ongoing quarter’s current account deficit considerably to above 2.5% of GDP. With gold imports unlikely to sustain this surge in the coming months, we expect the monthly merchandise trade deficit figures to ease relative to the levels seen in October 2025. Overall, we foresee India’s current account deficit at a relatively manageable ~1.1-1.2% of GDP in FY26,” wrote Aditi Nayar, chief economist at Icra.
According to the RBI, the CAD stood at $12.3 billion in Q2FY26, as against $20.8 billion in Q2FY25. Merchandise trade deficit came in at $87.4 billion in Q2FY26, lower than $88.5 billion in the year ago period.
Net services receipts increased to $50.9 billion in Q2FY26 from $44.5 billion a year ago.
Services exports have risen on a year-on-year basis in major categories such as computer services and other business services.
Net outgo on the primary income account, mainly reflecting payments of investment income, increased to $12.2 billion in Q2FY26 from $9.2 billion in Q2FY25, the RBI stated.
Personal transfer receipts under secondary income accounts, mainly representing remittances by Indians employed overseas, rose to $38.2 billion in Q2 this fiscal year from $34.4 billion in Q2FY25.
In the financial account, foreign direct investment (FDI) recorded a net inflow of $2.9 billion in Q2FY6 as against a net outflow of $2.8 billion in the corresponding period of 2024-25.
Foreign portfolio investment (FPI) recorded a net outflow of $5.7 billion in Q2FY26 as against a net inflow of $19.9 billion in Q2FY25.
Net inflows under external commercial borrowings (ECBs) amounted to $1.6 billion in Q2FY26 as compared with net inflows of $5.0 billion in the corresponding period a year ago. ECB inflows have been rather strong in recent quarters as many large companies found these foreign loans cheaper, even after hedging costs.
Non-resident deposits (NRI deposits) recorded a net inflow of $2.5 billion in Q2F26 as compared with $6.2 billion a year ago.
BoP during H1FY26
India’s current account deficit declined to $15 billion (0.8% of GDP) in H1FY26 from $25.3 billion (1.3% of GDP) in H1FY25. Net invisible receipts at $141.3 billion were higher in H1 this year than that of $ 123.0 billion a year ago, primarily on account of net services receipts and net personal transfers. Net FDI inflows increased to $7.7 billion in H1FY26 from US$ 3.4 billion in H1FY25.
FPI recorded net outflows of $4.1 billion in H1FY26 as against net inflows of $20.8 billion a year ago.
