Datanomics: Services cushion shrinks as trade deficit pushes CAD deeper

Chief Economic Advisor (CEA) V Anantha Nageswaran recently said that balance of payments (BoP) pressure would remain a near-constant challenge, citing rising imports and dependence on key commodities. 

 

Within the BoP, the current account yielded a deficit (CAD) in the first quarter of financial year 2026-27 (Q1FY27), reversing the surplus seen in Q4FY26, as the merchandise trade deficit widened.  

 

The trade deficit rose to $86.1 billion, or 9.47 per cent of gross domestic product (GDP), from 6.83 per cent a year ago. The July figures indicated that CAD may be even higher in Q2FY27. However, one must be cautious in interpreting this, since the trade deficit narrowed in August.  

 

The services surplus cushioned only part of the trade gap. Adding to the strain, heavy foreign portfolio investment (FPI) outflows weighed on the capital account since Q2FY26.  

 

The July figures give hope on this front. Foreign direct investment (FDI) has also been on the rise after negative flows in Q3FY26. A sharp $21 billion drawdown from forex reserves financed the CAD because the capital account was also in deficit in Q1FY26. The July figures give hope on this front too.