India's CAD could exceed 1% of FY26 GDP as external risks intensify

Economists forecast India's current account deficit (CAD) will exceed 1% in FY26, citing capital outflows, U.S. tariffs, and a widening trade deficit, despite strong services exports and remittances

Economists and ratings agencies have cautioned that India’s current account deficit (CAD) might breach the one per cent mark for the ongoing financial year 2026 (FY26), due to steep 50 per cent US tariffs and high capital outflows. But they expressed hope that a reworked US tariffs regime, lower crude prices and a surplus in the services trade could stop the CAD from widening.

 

In FY25, the country’s CAD was 0.6 per cent of GDP, while in the first quarter of FY26 it came in at 0.2 per cent of GDP (gross domestic product). The last time CAD remained above the one per cent threshold for the entire financial year was in 2023, at 2 per cent.

 

 

Capital flight  

 

Foreign portfolio investors (FPIs) withdrew nearly $4 billion from Indian equities in August 2025-- the steepest monthly outflow since January-- driven primarily by financial stocks. Of this, about ~232.9 billion was pulled from financial sector equities alone, reflecting the highest sectoral exodus in seven months, thanks to narrowing profit margins and worries about consumer lending quality.

 

Adding to the drag, net foreign direct investment (FDI) slipped 21.1 per cent year-on-year to $4.9 billion in Q1FY26, with gross inflows rising but larger outward remittances leading to the weakest quarterly tally in almost five years.

 

ICRA recently said that India’s CAD narrowed sharply to $2.4 billion (0.2 per cent of GDP) in Q1FY26, substantially below forecasts, due to robust remittances and buoyant services exports. Still, the agency expects the deficit to expand to 1.5 per cent of GDP in Q2, citing the broader merchandise trade gap and the tariff hit.

 

“If tariffs persist through the financial year, ICRA expects India’s CAD to exceed 1 per cent of GDP in FY2026, compared with 0.6 per cent in FY2025,” it noted.

 

Echoing similar concerns, Crisil projected CAD at 1.3 per cent of GDP for FY26, saying that the merchandise trade deficit will come under pressure from US tariffs and slowing global growth.

 

“However, surplus in the services trade and healthy remittances should limit the widening of CAD,” it added.

 

In a note, QuantEco Research pointed out that India posted a slim balance of payments surplus in Q1, but warned that the outcome for FY26 hinges on tariff negotiations.

 

“If the penalty tariff of 25 per cent gets revoked soon, then our existing forecast of 0.8% on the CAD should broadly hold. On the other hand, if the penalty stays through FY26, then CAD could increase to 1.1-1.2 per cent of GDP, accompanied by a BoP (balance of payments) deficit of USD 10-20 billion,” it added.

 

Mixed picture

 

However, economists remain divided on timing and intensity of the tariff impact.

 

Madan Sabnavis, chief economist at Bank of Baroda cited factors such as export customisation, long-term contracts, and limits on competitors like Vietnam, which may delay the shock’s full effects into the March quarter.

 

“The CAD may not come under too much pressure this year, and India may remain comfortably placed,” he said.

 

Others struck a more cautious note.

 

Radhika Rao, senior economist, DBS Bank said lower oil prices should cap CAD below 1 per cent, but flagged vulnerability due to volatile portfolio flows and dependence on investment inflows.

 

NR Bhanumurthy, director, Madras School of Economics cited “downside risks on the external account” from both tariffs and capital outflows, warning that the CAD could cross 1 per cent if tariffs persist, though strong services exports and the possibility of a ratings upgrade provide partial relief.