India’s current account deficit (CAD) widened sequentially to USD 12.3 billion in the second quarter of FY26, representing 1.3% of the Gross Domestic Product (GDP). The expansion, up from 0.3% in the previous quarter, was primarily driven by a massive surge in gold imports and a contraction in merchandise exports following the implementation of higher US tariffs.
Trade Gap Expands on Gold Surge
The merchandise trade deficit proved to be the central pressure point for the economy this quarter. Assessments from Crisil, ICICI Bank Research, and Emkay Global indicate that a sharp appetite for yellow metal played a pivotal role, with gold imports surging nearly 150% quarter-on-quarter to touch USD 19 billion.
Simultaneously, the export engine faced resistance. Goods exports declined on a sequential basis, weighed down by the impact of higher tariffs imposed by the United States on Indian shipments. Consequently, overall goods exports stood at approximately USD 109 billion against imports of nearly USD 197 billion, widening the trade gap.
Services and Remittances Provide Cushion
Despite the widening merchandise deficit, India’s intangible exports remained robust. Services exports recorded double-digit growth, with Crisil estimating receipts from IT and business services at USD 101.6 billion for the quarter. Net services exports rose by 14% year-on-year.
Inward remittances also continued to act as a stabilizer for the external sector, climbing to between USD 36 billion and USD 39 billion. These flows helped offset a portion of the merchandise trade imbalance, though they were insufficient to prevent the overall widening of the CAD.
Capital Account and BoP Slippage
A significant moderation in financial flows further complicated the external balance sheet. The capital account surplus shrank drastically to USD 0.6 billion (0.1% of GDP), a steep drop from the USD 8 billion recorded in the previous quarter.
Analysts at Emkay Global highlighted net outflows from Foreign Portfolio Investors (FPI) and subdued Foreign Direct Investment (FDI) as key factors. ICICI Bank Research also pointed to reduced external assistance and softer loan disbursements.
This weakening of financial flows pushed India’s Balance of Payments (BoP) into a deficit of USD 11 billion for Q2 FY26. The Reserve Bank of India’s (RBI) foreign exchange reserves saw a corresponding drawdown of USD 10.9 billion on a BoP basis.
Outlook: Rupee Pressure and Fiscal Adjustments
Looking ahead, the road remains challenging. Emkay Global has revised its full-year FY26 CAD projection upward to 1.4% of GDP from an earlier estimate of 1.2%. The brokerage anticipates negative export growth of 7% for the year and projects a 22% rise in gold imports.
The currency market may also see adjustments. Analysts suggest that policy preferences could shift toward allowing a softer rupee to mitigate the shock of tariffs on exports. Emkay projects the USD/INR exchange rate to trade in the 88-91 range through the end of the fiscal year, contingent on the progress of U.S.-India tariff negotiations.
While healthy services exports are expected to continue cushioning the economy, Crisil and ICICI Bank caution that global headwinds, persistent demand for imports, and elevated tariffs could keep India’s Balance of Payments under pressure, with potential full-year deficits reaching USD 22-23 billion.
