India's Current Account Deficit Expected to Widen in FY27, Capital Flows to Support Rupee in H2: ICICI Bank Report

India's current account deficit is likely to widen in FY27, with the goods deficit expected to reach $390 billion amid strong domestic demand and elevated imports, according to a recent report by ICICI Bank.

The private lender noted that India's goods deficit widened sharply to $85.7 billion in Q1 FY27 from $68.9 billion in the corresponding period last year. This increase was primarily driven by elevated oil prices and a surge in non-oil-non-gold imports. Specifically, the non-oil-non-gold deficit alone climbed to $55 billion in April-July FY27 from $42 billion the previous year.

Despite the widening merchandise deficit, the current account deficit remained contained at $6.2 billion in Q1, compared with a surplus of $1.2 billion a year ago. This was largely supported by a 9 percent year-on-year rise in services exports to $52.2 billion and a sharp 34 percent year-on-year increase in remittances, which reached $41.4 billion. ICICI Bank pointed out that remittance inflows appeared front-loaded, with $29.5 billion recorded in April-May compared to $11.9 billion in June.

As domestic demand continues to expand, ongoing import activity is expected to keep the goods deficit elevated. Based on current trends, the lender estimates the goods deficit will increase to $390 billion in FY27. Assuming slightly lower oil prices in the second half of the year, the goods deficit is projected to be around $265 billion in the remaining eight months, compared to $237 billion last year.

On the capital flows front, foreign portfolio investor (FPI) equity flows have reversed from $6.6 billion of outflows in the first fortnight of June to $5.4 billion of inflows since then. Debt inflows have similarly strengthened to $7.3 billion, aided by changes in government securities taxation and a more positive currency outlook. Furthermore, India's prospective inclusion in the Bloomberg index is expected to keep passive debt inflows strong even into FY28.

A significant shift in capital flows has also been observed in FCNR inflows, which increased to $52.3 billion as of August 13, up from $36.7 billion at the end of July. Consequently, the overall balance of payments surplus for the year is estimated at around $55 billion, which is viewed as positive for the rupee in the medium term. Over the longer term, the rupee's outlook will remain dependent on Asian currencies and capital inflows, with renewed pressure on Asian currencies potentially creating a depreciation bias for the Indian currency.

"The widening current account deficit projected for FY27 highlights the impact of strong domestic demand and elevated import costs on the broader economy. However, the resilience shown by services exports, strong remittance inflows, and the significant turnaround in foreign capital and FCNR inflows provide a crucial balancing effect. For businesses operating in the Indian market, monitoring these macroeconomic shifts in currency stability and capital flows will be essential for financial planning and risk management in the medium term." — Dr. Shishir Gupta, Founder & CEO, StartupLanes