India’s Current Account Deficit Remains Contained at $3.1 Billion in Q1 FY27

India’s current account deficit (CAD) remained contained at $3.1 billion in the first quarter of FY27, registering a marginal increase from the $2.9 billion recorded during the same period a year earlier. This came despite a sharp expansion in the merchandise trade gap driven by sustained high global crude petroleum prices, which were affected by the effective closure of the Strait of Hormuz following the West Asia crisis.

Data from the Reserve Bank of India (RBI) indicates that the goods deficit widened significantly to $85.7 billion in Q1 FY27, compared to $68.9 billion in Q1 FY26. On the capital side, the account shifted from a net inflow of $7.4 billion in Q1 FY26 to a net outflow of $5 billion in Q1 FY27, primarily led by a sharp reversal in foreign portfolio investment (FPI).

The CAD-to-GDP ratio has experienced fluctuations over recent quarters. After registering a 0.13 per cent surplus in Q4 of FY25, the current account moved into a deficit of 0.12 per cent of GDP in Q1 FY26 following the announcement of Trump’s ‘Liberation Day’ tariffs. The imposition of penal tariffs on India for purchasing Russian crude widened this deficit to 0.57 per cent in Q2, before standing at 0.30 per cent in Q3. It subsequently returned to a 0.36 per cent surplus in Q4 of FY26 as the US rolled back some tariff hikes and exports to alternative destinations improved.

The capital account also weakened in Q1 FY27. FPI flows deteriorated from a $1.6 billion inflow in Q1 FY26 to a $9.6 billion outflow in Q1 FY27, while external commercial borrowings shifted from a $5.3 billion inflow to a $0.1 billion outflow. However, these outflows were partially offset by stronger foreign direct investment (FDI) inflows, which increased to $7.8 billion from $4.8 billion a year earlier.

Net services exports offered substantial support during the quarter, rising to approximately $52.2 billion between April and June 2026, compared to $47.9 billion in the corresponding period of the previous year. This growth reinforced the role of services in financing the merchandise deficit.

Additionally, capital inflows strengthened recently. RBI data shows that $65.4 billion flowed through FCNR(B) deposits under its special swap facility by August 21. Forex inflows through ECB and OFCB routes amounted to about $2.6 billion and $4.8 billion respectively, following operationalisation on June 8, prompting the central bank to advance the facility's closure to August 31 from September 30. FPIs also invested $2.3 billion in India between August 1 and August 21, following a $4.2 billion net investment in July after regulatory easing on June 5.

"The containment of India's current account deficit at $3.1 billion in Q1 FY27, despite global crude pressures and trade disruptions, highlights the vital resilience provided by our robust services sector and steady foreign direct investments. While capital outflows and merchandise trade gaps present near-term challenges, the strong performance in services exports and recent foreign-currency deposit inflows demonstrate the underlying stability of the external sector and offer crucial buffers for the economy moving forward." — Dr. Shishir Gupta, Founder & CEO, StartupLanes