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In Q1 FY 2026, India’s Current Account Deficit (CAD) fell sharply to 0.2% of GDP primarily due to robust performance of Global Capability Centres (GCCs) in driving IT and business services exports. Moreover, Q1 also saw better capital inflows, which helped the RBI settle a major portion of its forward sales.
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Current Account Deficit at 0.2% of GDP
India recorded the lowest CAD of USD 2.4 billion in Q1 FY26, since Q1 FY17. The sharp fall in CAD was because of the improvement in GCC-led IT and business service exports. This has helped offset a wider merchandise trade deficit, lower tourist arrivals, and lower remittances.
Trade and Services Performance
The merchandise trade deficit of India widened to USD 68.5 billion in Q1 FY26 from USD 63.8 billion in Q1 of FY25. However, the strong performance of the services sector has helped cushion the impact of this deficit.
In this quarter, the net invisibles increased to a staggering USD 66.1 billion in Q1 FY26, up from USD 55.2 billion a year ago.
Services exports acted as India’s safety net and helped record a low CAD in Q1; the rising trade deficit of merchandise and large FPI equity outflows are however, major concerns.
Positive Net Capital Inflow
In this quarter, India’s net capital and financial account (excluding FX reserves) posted a surplus of USD 7.7 billion, after being weak since Q2 FY25.
Improved Equity FPI flows, net FDI recovery in April, better trade finance, and NRI deposits together helped mitigate the significant impact of the RBI's forward sales maturity.
Income Outflows and Effects of Remittances
Income outflows remained high in Q1 FY26 due to higher payments on Foreign Portfolio investment (FPI) equity income. Additionally, in Q1 FY26, India’s FDI outflow increased to USD 21.5 billion from USD 18.1 billion in Q4 FY26, reflecting stronger repatriation of earnings by foreign investors.
Also, remittances saw a seasonal dip and the net income outflows widened to USD -14.8 billion in Q1 FY26 compared to -14.5 billion last quarter.
The rupee has crossed ₹88 against the dollar due to widening goods trade deficit, heavy FPI outflows and FDI repatriation, especially VC / PE exit.
Future Outlook
Even though the Core BOP has weakened in Q2 so far and the rupee is under pressure now, the situation may stabilise because:
- India’s CAD is still low due to the strong services exports.
- The US is trying to weaken the dollar, which should indirectly help the rupee.
To Conclude
A low CAD, supported by services exports, particularly from the GCC, has provided a cushion for the impact of the merchandise trade deficit. This has helped to keep the balance of payments stable and has reduced pressure on the rupee.
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