India’s current account deficit (CAD) is expected to nearly double in the current financial year (FY26) to 1.2% of gross domestic product (GDP), up from 0.6% in FY25. This is according to a report by Union Bank of India, which cites rising trade and geopolitical tensions as the primary reasons for the expected increase. The report notes that India’s merchandise trade deficit widened sharply in July 2025 to $27.35 billion, compared to $18.7 billion in June, which may lead to a further widening of the current account deficit in the second quarter of FY26.
One key factor contributing to the expected increase in CAD is the recent tariff hike, which is expected to disrupt exports in several sectors, including textiles, gems and jewelry, auto components, and chemicals. The report notes that the full impact of these disruptions will need to be closely monitored in the coming months. Additionally, global commodity prices, particularly oil and metals, will play a significant role in shaping India’s external balance.
The report highlights that India’s current account balance is highly sensitive to oil prices, with every $10 per barrel move in crude oil prices impacting the annual current account balance by nearly $15 billion. Geopolitical risks, including tariff concerns, will continue to influence India’s trade dynamics, and any trade deals signed by India with the US or Europe could also have a significant impact on the external balance situation.
Despite these challenges, the report also notes some positive factors, including lower oil prices, which could significantly support the current account dynamics if sustained. Services exports and remittances have also shown resilience, and if they continue to hold their momentum, India may see a positive surprise in its external position despite global trade tensions.
However, the report cautions that persistent trade tensions could pose a downside risk to domestic growth. Overall, the Union Bank of India report paints a cautious outlook, pointing to both risks and potential supports for India’s current account in the current financial year. The report suggests that close monitoring of the situation will be necessary to navigate the challenges and opportunities ahead.