India's current account deficit widened to US$ 4.2 billion (0.5% of GDP) in Q1:2026-27, compared to US$ 3.4 billion (0.4% of GDP) in the corresponding quarter of the previous fiscal year, according to the Reserve Bank of India. The Economic Times reports that this represents a significant increase in the country's external account balance, reflecting changing trade dynamics and capital flows during the quarter. The increase in the CAD was primarily driven by a widening merchandise trade deficit, which more than offset stronger net services receipts and higher personal transfers. As per Business Standard, the widening in CAD was primarily due to a higher merchandise trade deficit, which rose to US$ 86.1 billion in Q1FY27 from US$ 68.9 billion in the year-ago quarter. The RBI has revised the current account deficit figure upward from the earlier estimate of US$ 3.1 billion, with the capital account deficit also revised to US$ 5.5 billion from US$ 5 billion.
The merchandise trade deficit increased substantially to US$ 86.1 billion in Q1:2026-27 from US$ 68.9 billion in Q1:2025-26, as reported by the RBI. Within this widening deficit, merchandise exports increased to US$ 132 billion from US$ 112.7 billion, while merchandise imports climbed to US$ 218 billion from US$ 181.6 billion during the quarter. The petroleum, oil and lubricants (POL) deficit widened to US$ 37.6 billion from US$ 32.2 billion a year earlier, contributing significantly to the overall trade imbalance. However, services exports rose to US$ 106.2 billion from US$ 97.4 billion, while services imports increased to US$ 54.6 billion from US$ 49.5 billion, helping to partially offset the trade deficit impact. The latest data shows net services receipts increased to US$ 51.6 billion in Q1 2026-27 from US$ 47.9 billion a year ago, with the RBI noting that services exports have risen on a year-on-year basis in major categories such as computer services, other business services and transportation services. Additionally, net secondary income, which largely reflects personal transfers and remittances, strengthened significantly to US$ 40.8 billion from US$ 30.9 billion in the year-ago quarter.
The capital account recorded a net outflow of US$ 3.9 billion in Q1:2026-27, against an inflow of US$ 7.9 billion in the year-ago quarter, according to Business Standard. However, the Reserve Bank of India announced a swap scheme in June including for Foreign Currency Non-Resident (Bank), or FCNR(B), deposits, which received an encouraging response. As per Business Standard, banks raised over $127 billion under the FCNR(B) scheme, with total mobilisation including external commercial borrowings and overseas foreign currency borrowings standing at over $136 billion as of Wednesday. This strong response led to the RBI deciding to close the scheme prematurely, indicating better-than-expected market response. Foreign direct investment (FDI) recorded a net inflow of US$ 6.1 billion in Q1:2026-27, higher than US$ 5.2 billion in Q1:2025-26, as reported by the RBI. In contrast, foreign portfolio investment (FPI) experienced a significant outflow of US$ 9.6 billion in Q1:2026-27, compared to a net inflow of US$ 1.6 billion in the same quarter last year. Personal transfer receipts under secondary income account increased to US$ 42.9 billion from US$ 33.2 billion in the previous year, primarily representing remittances by Indians employed overseas.
The overall balance of payments for the quarter were at a deficit of US$ 8.1 billion, as reported by the Economic Times. The country's foreign exchange reserves decreased by US$ 8.1 billion in the first quarter on a balance of payments basis, which does not include the change in valuation of the forex kitty. Foreign exchange reserves in nominal terms however decreased more significantly -- US$ 22.5 billion during April-June 2026, according to the RBI. This represents the third consecutive quarter of capital outflows, led by sustained FPI outflows, which led to a drawdown of reserves to the tune of US$ 8.1 billion, despite the low CAD print. The Economic Times reports that after adjusting the error and omission of US$ 1.6 billion, the current account came at US$ 3.9 billion, while the capital account deficit figure was also revised to US$ 5.5 billion from US$ 5 billion. However, the second-quarter data is likely to show a big balance of payments surplus due to the FCNR(B) scheme success.
The FCNR(B) scheme success has created additional challenges for monetary policy, with surplus liquidity in the system surging to over ₹6.6 trillion, the highest level since April 2022. As per Business Standard, the central bank has not had much success in absorbing excess liquidity through variable-rate reverse-repo auctions, partly because of the low offer rate. The weighted average call rate has slipped below the policy repo rate, while money-market rates are declining at a time when inflation rate is expected to increase. This sustained excess liquidity might undermine the RBI's inflation-management objective, and the central bank may need to consider other ways of managing liquidity, including an increase in the cash reserve ratio for a limited period. According to ICRA's chief economist Aditi Nayar, India's current account deficit rose slightly to US$ 4.2 billion in Q1 FY2027 from US$ 3.4 billion in the year ago quarter, with the material widening in the merchandise trade deficit owing to the surge in commodity prices being largely offset by the healthy expansion in net invisible earnings. The high trade deficit and portfolio investment outflows continue to put pressure on India's external account, indicating that global uncertainties and commodity price tensions continue to impact the country's external sector performance.
