India's Current Account Deficit Widens In Q1

Synopsis

An India study on September 1 by the Reserve Bank of India (RBI) revealed that its current account deficit (CAD) widened to $4.2 billion (0.5% of GDP) in the first quarter of fiscal year 27, compared with $3.4 billion a year ago. The change came from a larger trade imbalance in goods, countered by higher services exports and remittances, but worsened by portfolio outflows, which redrew the balance of payments to the deficit.

Despite the cushion provided by services, the trade gap widened in the second quarter of 2016

The preliminary data by Reserve Bank of India on Tuesday showed that India's current account deficit rose to $4.2 billion or 0.5% of GDP in the April-June quarter of the current financial year, with the country's merchandise trade deficit surging.

The RBI's own release said this was "exactly the same" as India's current account deficit was placed at US$ 4.2 billion, or 0.5 per cent of GDP in Q1:2026-27, down from US$ 3.4 billion (0.4 per cent of GDP) in Q1:2025-26.

Merchandise trade deficit rose to $86.1 billion for the quarter compared to $68.9 billion in the same quarter last year. While the traditionally strong services sector kept performing, this blistering fall in goods trade was the major contributor to the overall CAD.

Services and Remittances Provide Some Offset services and remittances provide some offset

In major services categories, while services exports have expanded on a year-on-year basis, the increase was the largest in Net services receipts, which grew to $51.6 billion in Q1 2026-27 from spending $47.9 billion in the corresponding quarter of the previous year, the RBI said. The remittance inflows also bolstered. Personal transfer receipts increased to $42.9 billion from $33.2 billion in the previous year.

The RBI said in the official statement on developments in the balance of payments that "services exports have increased year on year in key services sectors like computer services, other business services and transportation services".

Money flows reverse direction

The funding aspect of the problem grew murkier. However, the capital account had a net outflow of $3.9 billion in Q1FY27 compared with $7.9 billion inflow in the previous year, primarily on account of net outflows in portfolio investment, which were at $9.6 billion against net inflows at $1.6 billion in the corresponding quarter of the previous year. Foreign direct investment, on the other hand, continued to be a bright spot: FDI increased to $6.1 billion from $5.2 billion.

Overall, the balance of payments showed a deficit of $8.1 billion in Q1FY27 compared with a surplus of $4.5 billion in the corresponding quarter of the previous year.

Reserve Valuation Losses

The valuation loss in foreign exchange reserves was valued at $14.4 billion in the quarter, as against a valuation gain of $25.3 billion recorded in the quarter one year ago, when gold prices changed and the US dollar appreciated relative to major currencies.

The valuation loss in foreign exchange reserves was valued at $14.4 billion in the quarter, as against a valuation gain of $25.3 billion recorded in the quarter one year ago, when gold prices changed and the US dollar appreciated relative to major currencies.

Reading the Numbers in Context

The deficit of 0.5 per cent of GDP is still within the bounds the RBI has defined as manageable, although it is surprising to see the switch in the previous quarter when the bank had projected it to widen to 0.8 per cent of GDP.

The latest deficit should be seen in the context of a long-term trend, as India had posted a $6.5 billion current account surplus in the previous quarter and quarterly data can fluctuate significantly depending on the changing patterns of trade, commodity prices, investment flows and seasonality across the year.