India’s External Position Steadies: Current Account Deficit Narrow at 0.2% of GDP in April-June

India’s external balances for the April-June 2025 quarter showed resilience, with the current account deficit (CAD) narrowing sharply to just 0.2% of GDP even as merchandise trade pressures persisted. According to data released by the Reserve Bank of India, the balance of payments recorded a surplus of $4.5 billion during the quarter, reflecting steady capital flows and strong services earnings.  

 Key Highlights  
- Balance of Payments surplus: $4.5 billion in April-June 2025  
- Current account deficit at $2.4 billion, only 0.2% of GDP  
- Merchandise trade deficit widened to $68.5 billion  
- Strong services exports and healthy capital inflows cushioned trade weakness  

Current Account Snapshot  
India’s current account, which captures trade in goods and services along with primary and secondary income flows, posted a modest deficit of $2.4 billion in the first quarter of FY26. This equaled 0.2% of GDP, considerably narrower than earlier quarters where external sector pressures weighed more heavily.  

The improvement has largely been driven by robust inflows from services, particularly IT, business, and travel-related exports, which helped offset the impact of a wider merchandise trade gap. Remittances from overseas Indians also remained steady during the period.  

Merchandise Trade Under Pressure  
The data revealed India’s merchandise trade deficit at $68.5 billion in April-June. Elevated global crude oil prices and strong import demand in segments like electronics and capital goods contributed to this shortfall. Although exports showed selective strength in engineering goods and pharmaceuticals, overall merchandise shipments remained under strain due to uneven global demand.  

Despite this, the ability of services to deliver strong net receipts has once again highlighted their role as a stabilizing factor for India’s current account. Services exports have consistently generated surpluses that now form a critical counterweight to merchandise deficits.  

Balance of Payments Surplus  
The overall balance of payments, which takes into account the current account as well as the capital and financial accounts, posted a surplus of $4.5 billion. This reflects continued resilience in foreign capital inflows, especially foreign direct investment alongside steady portfolio inflows during the quarter.  

The positive balance offers space for the Reserve Bank of India to add to its foreign currency reserves, providing a further buffer against external shocks. The return to surplus also marks an improvement from a more volatile external position that had occasionally dipped into net outflows in previous cycles.  

 Capital Flows Provide Cushion  
While trade deficits remain high, the capital account continues to provide support. Policymakers have highlighted India’s strong macro fundamentals, which continue to attract foreign investors. Inflows into equity and debt markets, coupled with direct investment activity, ensured that the country’s financing requirement was comfortably managed despite strong import bills.  

 Economic Implications  
A shallow CAD of just 0.2% of GDP indicates that India’s external sector remains broadly stable despite global uncertainties and persistently high energy import dependence. This outcome offers the following implications:  

- Provides macroeconomic comfort to policymakers as external imbalances remain under control.  
- Reduces pressure on the rupee, which has held within a relatively stable range in recent months.  
- Enhances market confidence by showing that merchandise trade stress continues to be balanced by services strength and capital inflows.  
- Supports prospects of further reserve accumulation by the RBI, underpinning currency stability.  

 The Road Ahead  
Looking forward, sustaining services exports and ensuring healthy capital flows will remain vital for shielding India’s current account from pressures in merchandise trade. Any easing in global energy prices could materially improve the trade deficit in coming quarters. However, potential risks continue to stem from global financial market volatility, oil price swings, and shifting interest rate differentials that could alter the capital inflow landscape.  

For now, India’s April-June data reflects a manageable external position, with a thin current account deficit and an encouraging balance of payments surplus. Policymakers and markets will likely take comfort from this resilience as they move into the remainder of FY26.  

Source: Reserve Bank of India, Reuters