Why Current Account Deficit (CAD) Matters for India’s Economy

WHY CURRENT ACCOUNT DEFICIT IS AN IMPORTANT METRICS?

The current account balance is reported by the RBI each quarter with a gap of 2 months. That means the current account balance for the December quarter is reported in the first week of March next year. To understand the importance of the current account balance, one must look at the 4 key components of the current account as under.

1. Merchandise trade deficit is the excess of goods imported over goods exported. This is normally in deficit as India heavily imports oil, gold, and electronic products.
2. Services trade surplus is the excess of services exported (principally software) over services imported. This is normally surplus and is growing in recent years.
3. Primary income is an outflow and includes the interest, dividends paid out on inbound investments and the wages paid to employees of global operations. This is a deficit.
4. Finally, there is secondary income, which is predominantly by nature of remittances by NRIs into India and this normally shows up a substantial surplus.

The current account deficit is the sum total of these 4 items. Normally, if the current account deficit (CAD) is above 3%, it is a cause of worry as it can lead to sovereign downgrades and also make the rupee very vulnerable.

THE CURRENT ACCOUNT STORY OVER THE LAST 3 YEARS

Here is a quick look at the CAD / CAS history of last 12 quarters.

Data Source: DGFT / RBI

Interestingly, the Indian economy had reported a current account surplus in the fourth quarter in the last two fiscal years. It remains to be seen if that can be repeated in the current year also. Despite the pressure of tariffs on exports, the impact on the CAD has been minimal. This is more due to the predominance of services surplus and inward remittances.

For the third quarter ended December 2026, the current account deficit at $13.5 billion stood at 1.3% of GDP. That is higher compared to 1.1% of GDP in the year ago period. However, this is a very small shift and is understandable considering the trade pressures. The CAD stands at 1.0% for the first 9 months, so the full-year CAD should be under 1.5%.

CAD BASKET IN DECEMBER 2025 QUARTER (Q3FY26)

Here is an itemized comparison of Q3FY26 CAD with Q3FY25 CAD.

Data Source: RBI

Here are quick thoughts on CAD basket for Q3FY26.

1. December 2025 quarter merchandise trade deficit was higher at $(93.60) Billion; which is sharply higher on a yoy basis. POL deficit is actually lower due to Russian oil impact, but the imports of gold and silver have skewed the CAD on the downside. The primary income outflows have been largely stable on a yoy basis.
2. Let us now turn to the current account boosters. For Q3FY26 services trade surplus at $57.50 Billion was 12.3% higher than in Q3FY25. Secondary income, representing remittances from abroad, is also higher 5.7% yoy at $35.10 Billion, amid global caution.

While positive triggers have shown improvement, the pressure is also visible on the merchandise trade deficit. That can be a tricky trapeze to balance.

CAD BASKET FOR NINE MONTHS OF FY26 (9M-FY26)

Here is the break-up of current account for 9M-FY26 and how it compares with 9M-FY25.

Data Source: RBI

Here are quick thoughts on CAD basket for 9M-FY26.

1. It has been a positive 9 months of FY26. While the merchandise trade deficit has been sharply higher on a yoy basis; this has been more than offset by the surge in services trade surplus as well as strong NRI remittances into India.
2. Despite the global turmoil, the current account deficit for the first 9 months of FY26 stands at a modest 1.0% of GDP, lower than 1.3% in the year ago period. Even if Q4 is not a surplus, the overall CAD for FY26 should still be withing comfort zone!

It remains to be seen, as to what would be the impact of the ongoing Iran crisis and the shutdown of the Straits of Hormuz in the fourth quarter.

CAD OUTLOOK FOR FY26

In the last 2 financial years i.e., FY24 and FY25; India had reported a current account surplus in Q4. However, that looks unlikely this year, especially considering the disruption in the form of tariffs and later the ongoing war. However, even in a worse case scenario, the full year CAD should not cross above the range of 1.3%-1.5% of GDP. That would still be a very comfortable situation to be in, at the end of a tumultuous year.