India's External Accounts Deteriorate Modestly in Third Quarter of FY26
India's external accounts have experienced a modest deterioration, though the extent is less than initially anticipated. According to data released by the Reserve Bank of India (RBI), the current account deficit (CAD) widened to $13.2 billion or 1.3% of GDP in the December quarter of the 2025-26 fiscal year. This represents an increase from the $11.3 billion (1.1% of GDP) recorded in the same quarter a year earlier.
Drivers of the Current Account Deficit Expansion
The primary factor behind this slippage was the performance of merchandise trade. Exports to the United States weakened significantly, contributing to an expansion of the trade deficit. Specifically, the trade deficit grew to $93.6 billion from $79.3 billion in the comparable period.
However, the services sector continued to provide crucial support to the economy. Net services receipts increased to $57.5 billion from $51.2 billion, bolstered by robust exports in computer and business services. Additionally, outflows under the primary income account, which largely consist of investment income payments, narrowed to $12.2 billion from $16.4 billion.
Remittances remained resilient, with personal transfer receipts rising to $36.9 billion from $35.1 billion, offering further stability to the external accounts.
Year-to-Date Performance and Capital Flows
The year-to-date picture presents a more positive outlook than the quarterly figure suggests. For the period from April to December 2025, the CAD moderated to $30.1 billion (1% of GDP), down from $36.6 billion (1.3% of GDP) a year earlier.
Capital flows during the quarter were mixed. Net foreign direct investment (FDI) recorded an outflow of $3.7 billion, slightly higher than the previous year. Foreign portfolio investment (FPI) saw a marginal net outflow of $0.2 billion, which is far smaller than the $11.4 billion withdrawn in the same quarter last year.
Non-resident deposits brought in $5.1 billion, up from $3.1 billion, while external commercial borrowings moderated to $3.3 billion from $4.4 billion. On a balance-of-payments basis, foreign-exchange reserves fell by $24.4 billion, which is less than the $37.7 billion depletion experienced a year ago.
Economists Offer Divergent Outlooks on Future Trends
Economists have differing perspectives on the future trajectory of India's balance of payments. Kaushik Das of Deutsche Bank suggests that a $20 billion rise in the CAD, driven by higher oil prices, could push the balance of payments back into a $20 billion deficit in FY27. This scenario could renew depreciation pressure on the Indian rupee if capital inflows remain weak.
Despite this, Das retains a year-end USD/INR target of 90, noting that the 40-currency trade-weighted real effective exchange rate stands at 94.7 and that geopolitical tensions may ease. He also points out that with $724 billion in foreign-exchange reserves, the RBI has sufficient room to curb excessive volatility in the currency markets.
Astha Gudwani, an economist with Barclays, provides a contrasting view. "From a deficit of $10.9 billion in Q2. With today's print, the FY25-26 (April-Dec) BoP stands at a $30.8 billion deficit. We expect a moderation in Q4 (owing to a seasonally favourable current account balance) to result in a full-year BoP deficit of $20 billion in FY25-26," said Gudwani.
Overall, while the quarterly data indicates a widening current account deficit, the broader annual trends and supportive factors like services exports and remittances suggest a manageable external account position for India in the near term.
