India BoP Q3FY26: CAD narrows; capital account slips into deficit
Synopsis
India’s BoP Q3FY26 data showed the current account deficit narrowing to 1.3% of GDP sequentially, supported by strong services exports, according to Motilal Oswal. However, the capital account slipped into a deficit due to foreign investment outflows, leading to a wider overall balance of payments gap. The brokerage expects FY26 CAD at about 0.9% of GDP, while warning higher oil prices could widen external imbalances.
BoP Q3FY26 data showed India’s current account deficit (CAD) narrowing sequentially to 1.3% of GDP, supported by robust services exports, even as the capital account turned into a deficit amid foreign outflows, according to a note by Motilal Oswal. The shift led to a wider overall balance of payments (BoP) deficit during the quarter.
Key Highlights
- Overall BoP deficit widened to $24.4 billion (2.4% of GDP) in Q3FY26, from $10.9 billion in Q2FY26, but narrowed from $37.7 billion in Q3FY25.
- Trade deficit expected to moderate to $92.8 billion in Q4FY26 as festive demand normalises.
- FY26 CAD projected at ~0.9% of GDP ($39 billion).
- FY27 CAD estimated at 1.0% of GDP ($44 billion), assuming average oil price of $65 per barrel.
India’s current account deficit (CAD) narrowed sequentially to $13.2 billion, or 1.3% of GDP, in Q3FY26, from an upwardly revised $14.1 billion (1.5% of GDP) in Q2FY26, supported by stronger invisible receipts, particularly services exports.
However, on a year-on-year basis, the deficit widened slightly to 1.3% of GDP from 1.1% in Q3FY25, as the merchandise trade deficit expanded faster than gains in services exports and remittances.
Services exports cushion widening trade deficit
The merchandise trade deficit widened to $93.6 billion (9.2% of GDP) in Q3FY26, compared with $89 billion in Q2FY26 and $79 billion in Q3FY25.
Goods exports increased 1.7% year-on-year, while imports rose 8.6%, driven largely by higher gold imports and stronger non-oil non-gold imports.
Despite this widening trade gap, net invisible receipts increased 18% year-on-year in the quarter. Net services exports grew 12%, supported mainly by demand for software and business services.
India’s core current account balance, which excludes petroleum products and valuables, remained in surplus at $40.7 billion (4% of GDP). This compares with $43.9 billion in Q3FY25 and $34 billion in the previous quarter.
Capital account turns negative amid foreign investment outflows
While the current account improved sequentially, India’s capital account moved into deficit during the quarter.
The capital account recorded a $10 billion deficit (1% of GDP) in Q3FY26, compared with a $2.1 billion surplus in Q2FY26.
The shift was largely driven by foreign investment outflows and significant withdrawals in other capital flows.
Net foreign investment remained negative during the quarter. Foreign direct investment (FDI) recorded net outflows of $3.7 billion, while portfolio investment declined for the second consecutive quarter, though the pace of outflows slowed. Banking capital inflows also moderated.
Oil prices remain a key risk to external balance
According to Motilal Oswal, every $10 per barrel increase in crude oil prices typically widens India’s oil deficit by $10–12 billion, equivalent to around 0.4–0.5% of GDP.
If oil prices sustain above $80 per barrel, India’s CAD could widen to around 2% of GDP. For comparison, the CAD stood at 2.1% of GDP in FY23, when crude prices averaged about $95 per barrel.
Rising geopolitical tensions in the Middle East could push oil prices higher, posing risks to India’s external balance, the rupee, and capital flows.
Strong forex reserves provide buffer
India’s external position continues to be supported by strong foreign exchange reserves.
As of February 20, the Reserve Bank of India’s foreign exchange reserves stood at $723 billion, providing an import cover of about 10.8 months.
For the first nine months of FY26, the current account deficit stood at 1% of GDP, compared with 1.3% in the same period of FY25.
Motilal Oswal expects the Indian rupee to weaken toward the 93 level in the near term, with possible intervention by the Reserve Bank of India in the foreign exchange market.
While strong service exports and steady remittance inflows could keep FY26 CAD manageable, sustained pressure from higher crude oil prices may influence the external balance outlook in FY27.
Quick FAQs
Q1. Why did India’s current account deficit narrow in Q3FY26?
Strong growth in services exports and higher invisible receipts helped offset a widening merchandise trade deficit.
Q2. What caused India’s capital account deficit in Q3FY26?
Foreign direct investment outflows, declining portfolio investment and increased other capital outflows pushed the capital account into deficit.
Q3. How do oil prices affect India’s current account deficit?
Higher crude oil prices increase the import bill. Every $10 rise in oil can widen the deficit by $10–12 billion.
Q4. How strong are India’s foreign exchange reserves currently?
India’s forex reserves stood at about $723 billion, covering roughly 10.8 months of imports.
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Pooja Malik is a business journalist with over six years of experience covering startups, entrepreneurship, and emerging trends. She has previously worked with leading media platforms such as YourStory Media and BW BusinessWorld, where she reported on business, policy, and market developments. Currently, she serves as Editor at The Inspirepreneur Magazine, where she writes and edits stories across business, lifestyle, and travel, with a focus on clarity, accuracy, and reader relevance.
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