India’s Current Account Deficit Set to Widen in FY26, While Forex Reserves Near Record High

Current Account Deficit Likely to Widen in FY26

India’s current account deficit (CAD) is projected to nearly double in FY26, rising to 1.2% of GDP compared to 0.6% in FY25, according to a report by Union Bank of India.

The report highlights upward risks stemming from global trade dynamics, geopolitical developments, and fluctuations in commodity prices, particularly crude oil.

Oil continues to be a key factor. Estimates suggest that every $10 per barrel change in crude prices could impact India’s annual current account balance by approximately $15 billion. Lower oil prices may ease the deficit burden, but volatility remains a concern.

Trade Dynamics and July 2025 Trends

India’s merchandise trade deficit widened sharply in July 2025, reaching $27.35 billion, up from $18.78 billion in June, marking the highest levels since November 2024.

Key drivers of the imbalance included:

  • Non-Oil, Non-Gold (NONG) Deficit: Rose to $12.28 billion in July from $7.83 billion in June.

  • Oil Trade Deficit: Expanded to $11.24 billion from $9.19 billion in June.

  • Gold Trade Deficit: Almost doubled, rising to $3.83 billion compared to $1.76 billion in June.

Meanwhile, the services trade surplus eased slightly to $15.63 billion in July 2025, compared to $16.21 billion in June. Despite this, the services sector continues to provide a strong buffer, recording a surplus of $188.75 billion in FY25, which helped balance the oil import deficit of $122.45 billion.

The total trade deficit (goods and services combined) spiked to $11.72 billion in July 2025, up significantly from $2.57 billion in June 2025.

Forex Reserves Near All-Time High

On the positive side, India’s foreign exchange reserves (forex reserves) increased by $4.74 billion in the week ending August 8, 2025, reaching $693.62 billion, according to the Reserve Bank of India (RBI).

This brings reserves close to their all-time high of $704.89 billion, recorded in September 2024. The rise was driven by gains in both foreign currency assets (FCA) and gold holdings.

  • Foreign Currency Assets (FCA): $583.98 billion.

  • Gold Reserves: $86.16 billion.

So far in 2025, India’s forex reserves have jumped by about $53 billion, following an increase of $20 billion in 2024 and a much larger $58 billion addition in 2023.

RBI Governor Sanjay Malhotra assured that India’s forex stockpile is sufficient to cover 11 months of imports, providing a robust cushion against external shocks.

Outlook: Balancing Risks and Strengths

While the widening current account deficit reflects challenges from oil prices, global trade shifts, and higher imports of capital goods, India’s strong forex reserves and robust services surplus ensure that the external position remains manageable.

Geopolitical developments, including tariff concerns and potential India-US or India-Europe trade agreements, will significantly influence the trajectory of the current account in FY26.

The government’s ability to balance import growth, energy security, and trade negotiations will be critical in maintaining stability, even as forex reserves provide a much-needed safety net.


Location: Pune, Maharashtra, India

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