FY26 CAD could fall as low as 0.9% as trade deficit narrows to 5-month low in Nov

Lower crude oil prices, easing gold imports and resilient services exports are prompting economists to highlight downside risks to the current account deficit (CAD) for FY26

India’s external position may be turning a corner, with economists saying the worst of the trade deficit appears to be behind us after a surprisingly strong performance in November.

Lower crude oil prices, easing gold imports and resilient services exports are prompting economists to highlight downside risks to the current account deficit (CAD) for FY26, with one estimate suggesting the CAD could slip below 1 percent of the GDP even as trade data remains volatile and global tariff risks linger.

Merchandise exports jumped 19.4 percent year-on-year to $38.13 billion in November, as against $34.38 billion in October, while gold imports fell sharply by 60 percent, helping narrow the trade deficit to a five-month low of $24.5 billion.

ICICI Bank Research too sees a downside risk to its earlier estimates for the merchandise gap of $340 billion and the current account deficit of $48 billion, and now sees the CAD at around 0.9–1.0 percent of GDP this fiscal, lower than the earlier estimate of 1.2 percent, with the deficit likely to remain near 1 percent of GDP in FY27 as well.

“The worst of the trade gap is likely behind us, with the current account deficit expected to improve in Q4 compared to Q3, following a multi-year high trade deficit of $41.7 billion in October that eased sharply to $24.5 billion in November, below the average seen in April-September of 2025-26 at $26.2 billion,” YES Bank said in a note on December 15.

Owing to the unusually high trade deficit in October, YES Bank expects the CAD to come in at around 2.0–2.1 percent of the GDP for Q3 FY26, but it is likely to ease back to a range of 0.6–0.8 percent on expectations of lower gold imports and oil prices.

Yet, other economists do not see the CAD falling that low for FY26.

Following the lower-than-expected trade deficit in November and a further drop in crude oil prices, there is downside risk to our FY26 CAD estimate of 1.6 percent of GDP. However, given the volatility in trade data, we are maintaining the estimate for now, said Gaura Sen Gupta, Chief Economist at IDFC First Bank.

India’s current account deficit widened to $12.3 billion, or 1.3 percent of GDP, in Q2FY26 (July–September) from $2.7 billion, or 0.2 percent of GDP, in Q1, driven by a wider trade deficit, even as the surplus from services and transfers increased.

While the average monthly merchandise trade deficit this fiscal year is higher at $27.8 billion, the monthly services surplus has improved to $16.6 billion during April–October FY26, up from $14.5 billion in the same period last year, providing some comfort.

Emkay Global’s Madhavi Arora also sees downside risks to the current account deficit estimate of 1.4 percent of the GDP in FY26 following November’s trade figures, noting that a continuation of current trends could push the deficit lower.

A lower CAD, supported by a narrower merchandise trade deficit, is crucial as India’s balance of payments remains under pressure, with foreign exchange reserves declining by $10.9 billion in Q2 of FY26, and subdued capital flows amid net FPI outflows.

However, while the outlook for CAD has improved, India’s capital account remains subdued due to ongoing foreign investment outflows, particularly in equities. Despite rising gross foreign direct investment (FDI) inflows, net FDI is lower because of these outflows, and the rupee has hit an all-time low of 90.78 per dollar, ICICI Bank Research said in a note, adding that despite this cyclical weakness, macro fundamentals remain strong, and a depreciating currency acts as a buffer against global headwinds.

Economists also noted that while India’s merchandise exports have faced pressure from elevated US tariffs, front-loading of shipments to American shores before steeper duties kicked in helped cushion the impact.

Most Indian exports started facing elevated tariffs of more than 50 percent since August 27. Shipments to the US in September fell 21 percent to $5.43 billion from $6.87 billion in August.

Even as exports to the US began rebounding in October with a sequential rise of over 15 percent versus September, year-on-year growth still contracted by nearly 9 percent that month.

But in November, exports to the US rose both on-year and sequentially at more than 22 percent and nearly 10 percent, respectively.

“Even as a favourable trade deal with the US hangs in balance and as the US questions the exports of rice from India to the US, India’s exports to the US sees a recovery in November, the second consecutive month of rise after bottoming out in September,” YES Bank said.

The growth in November is likely driven by higher exports of items largely unaffected by tariffs, such as smartphones, pharmaceuticals, and petroleum products.

Indian exports in categories, that are also free from reciprocal tariffs in the US, rose significantly in November as electronics jumped almost 39 percent on-year, drugs and pharmaceuticals rose nearly 21 percent, and petroleum products grew over 11 percent.

To be sure, economists say that the outcome of the negotiations for a trade deal between India and the US continues to be crucial, as the absence of an agreement could have negative implications for India’s current account deficit in the next fiscal year.

“Given the positive statements from both Indian and the US government, it is likely that an agreement is reached but the timeline remains uncertain. In case a trade deal isn’t reached, it would have negative implication for FY27 CAD,” IDFC’s Sen Gupta says.