India Watch: Q1 26 Current account: Temporary comfort, policy measures likely to support

Research evidence excerpt

India Watch: Q1 26 Current account: Temporary comfort, policy measures likely to support

negative in FY26 at USD23.6bn (vs a small deficit of USD5bn in FY25), marking the FPI: Foreign portfolio investment

second year of negative BoP for India. FY: Financial Year (April to March)

GDP: Gross Domestic Product

Middle East conflict continues to cloud India’s BoP outlook RBI: Reserve Bank of India

The external position in India remains under strain, with capital account issues now

yoy: Year over Year

compounded by a widening current account deficit. Further adding to this headwind is

India's large export and remittances exposure to the Middle East, along with portfolio

outflows, which in turn keep the rupee under pressure. Rising energy prices also add to the

risks. With the Iran conflict still having supply effects (three months and counting),

availability of energy remains a challenge. Average crude prices for May were above

USD100/barrel, still climbing at the margin on average. We project a large current account

deficit of USD 87.6bn (2.1% of GDP) for FY27, declining to USD 45bn (1% of GDP) in FY28,

as oil prices normalize back lower (see the reports: The problem of the Rupee 1 and 2).

Rupee under pressure; fixing the flow a solution

The rupee has remained under constant pressure in recent months, with the Middle East

war acting as recent headwind. While the stock position, reflected in a stronger external

balance sheet and adequate reserves, remains robust, the core issue lies in fragile flow

dynamics. We believe that policymakers can either compress the current account deficit

at the cost of growth or attract higher capital inflows. However, slowing demand risks

pushing India back into the Thirlwall's constraint. A more sustainable solution lies in