India’s current account deficit (CAD) remained contained at $3.1 billion in the first quarter of FY27, only marginally wider than the $2.9 billion recorded a year earlier, despite a sharp expansion in the merchandise trade gap, caused by sustained high global crude petroleum prices due to the effective closure of the Strait of Hormuz, following the West Asia crisis.
businessline analysis of the latest balance of payments data from RBI shows that the goods deficit widened to $85.7 billion in Q1 of FY27 from $68.9 billion in Q1 of FY26. On the capital side, the account swung from a $7.4 billion net inflow in Q1 of FY26 to a $5 billion outflow in Q1 of FY27, led by a sharp reversal in foreign portfolio investment (FPI).
CAD swings from surplus to deficit, but remains manageable
The CAD-to-GDP ratio has swung sharply in recent quarters. After registering a 0.13 per cent surplus in Q4 of FY25, the current account moved into deficit at 0.12 per cent of GDP in Q1 FY26, following the announcement of Trump’s ‘Liberation Day’ tariffs. The imposition of penal tariffs on India for purchasing Russian crude widened it to 0.57 per cent in Q2, and stood at 0.30 per cent in Q3. It then swung back into a 0.36 per cent surplus in Q4 of FY26, as the US rolled back some of the tariff hikes and exports to other destinations improved.
This likely stems from the fact that the US is India’s single largest export destination, the source of our biggest trade surplus by value. Our import basket being dominated by petroleum crude and other energy sector inputs, price rise in these also have a similar impact on our CAD.
Adding onto this, the capital account also weakened considerably, in Q1 of FY27 as FPI flows deteriorated from a $1.6 billion inflow in Q1 of FY26 to a $9.6 billion outflow in Q1 of FY27, while external commercial borrowings moved from a $5.3 billion inflow to a $0.1 billion outflow. These were partly offset by stronger FDI inflows, which rose to $7.8 billion from $4.8 billion.
However, the future outlook for the balance of payments has improved on some fronts. The net services exports during April-June 2026 were about $52.2 billion. This compares with net services exports of about $47.9 billion a year earlier, reinforcing the growing role of services in financing the merchandise deficit.
Capital inflows have also strengthened recently. Data from RBI shows $65.4 billion had flowed through FCNR(B) deposits under its special swap facility by August 21. Additionally, forex inflows through the ECB and OFCB routes also amounted to about $2.6 billion and $4.8 billion respectively, till August 21, in about a month (announced on June 5th and operationalised on June 8th), prompting the central bank to bring forward the facility’s closure to August 31 from the originally envisioned September 30.
Meanwhile, FPIs also invested $2.3 billion in India during August 1-21, after a $4.2 billion net investment in July, following the 5th June regulatory easing, including simplified onboarding measures. Together, stronger services earnings and renewed foreign-currency and portfolio inflows provide additional buffers against the persistent merchandise trade vulnerabilities.
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