India’s current account deficit likely to widen in Q4 and subsequent quarters

A host of factors including India's growing trade deficit in the face of surplus factory capacity in China, uncertainty from the US reciprocal tariffs announcement, short-term foreign capital outflows, weaker remittances due to a slowing global economy, and the potential headwinds from US President Donald Trump’s proposed tax on remittances could lead to a widening of India's current account deficit (CAD), experts said. 

This widening is expected in Q4FY25 and subsequent quarters unless there’s a change in macroeconomic fundamentals, they added.

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To be sure, the CAD rose marginally to $11.5 billion, or 1.1% of GDP, in the October-December 2024 quarter (Q3FY25) from $10.4 billion, or 1.1% of GDP, a year earlier, despite strong growth in service exports.

A widening current account deficit would put pressure on the rupee and inflate costs for businesses

On a sequential basis, the CAD moderated from $16.7 billion (1.8% of GDP) in Q2FY25, according to the latest data released by the Reserve Bank of India (RBI) in March.

Trade deficit

India’s merchandise trade deficit rose to a five-month high of $26.42 billion in April on the back of higher imports, even as exports rose, according to the provisional data released by the commerce ministry last month.

Interestingly, the latest GST data revealed a sharp surge in imports in May. While net domestic GST revenue (after refunds) grew 9.7%, matching April’s pace, net customs revenue from IGST and cess on imports soared 73% in May, a stark contrast to the modest 5.2% growth recorded the previous month.

“There is a risk of the current account and trade deficits widening this year, along with short-term foreign capital outflows as US yields rise,” said Bhanumurthy N.R., director at the Madras School of Economics.

“A global economic slowdown and the proposed US tax on remittances could also weigh on remittance inflows, adding further pressure to the external account,” he said.

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On Monday the yield on the benchmark US 10-year notes rose 3.2 basis points to 4.45%, while the 30-year bond yield increased 4.6 basis points to 4.98%. In contrast, Indian 10-year government bonds currently yield 6.22%.

Global uncertainties are prompting investors to favour safer, higher-yielding US bonds over emerging-market debt.

Fiscal year 2025 began with strong foreign investor inflows of around ₹28,000 crore but saw a sharp reversal in the second half, with over ₹2 trillion sold off, resulting in net outflows of about ₹1.53 trillion ($17.8 billion) for the year.

Trump's tax on remittances

Meanwhile, the Trump administration has proposed a 5% excise tax on outward remittances, which would affect millions of individuals, including green card holders and workers on H1B visas.

Remittances, defined by the World Bank as funds sent from a person working abroad to their home country, are typically personal transfers between family members or individuals.

“A further rate cut by the central bank could push government bond yields lower, potentially driving more foreign capital toward higher-yielding US bonds,” Bhanumurthy added.

Also read: Trump’s tariffs push Indian exporters to redraw game plans

According to a recent report by the Union Bank of India, India's CAD is expected to widen to 1.2% of GDP in FY26 from an estimated 0.9% in FY25, with the outlook for exports remaining uncertain due to the looming threat of reciprocal tariffs by the US on trading partners. It added that despite a 90-day pause on the reciprocal tariffs, India's export outlook remains uncertain.

A spokesperson for the ministry of finance didn't respond to Mint's emailed queries.

Import mix

Meanwhile, subdued oil prices and a sharp rise in gold—driven by central banks hedging against dollar volatility— could reshape India's import mix.

Despite stable crude prices through most of FY25, India’s crude oil imports rose by 4.2% to 242.4 million tonnes (MT) from 232.7 MT in FY24, according to official data.

This 9.7 MT increase pushed the country’s import dependency slightly higher—from 88.6% in March 2024 to 89.1% in March 2025—highlighting continued reliance on overseas energy supplies.

The rise in volumes, along with a modest uptick in global prices during parts of the year, drove the import bill for crude and petroleum products to $161 billion in FY25 from $156.3 billion in the previous fiscal year.

Crude prices, however, have softened notably in the first two months of FY26.

The Indian basket of crude—a mix of sour and sweet grades—fell from $67.73 per barrel in April 2025 to $64.04 in May, a decline of $3.69 per barrel.

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"For the central government, crude oil prices in the range of $60-$65 per barrel are comfortable and allow us to build adequate buffer stocks," said a senior official, who did not wish to be named. "At these price levels, we will not only meet our energy needs more affordably but also strengthen energy security," the official added.

Meanwhile, petroleum product demand continues to rise, with estimates from the Petroleum Planning and Analysis Cell (PPAC) projecting record consumption of 252.9 MT in FY26, up 4.6% year-on-year.

Gold is also gaining weight in the import mix. In April, India’s gold imports rose 7.6% year-on-year to ₹26,499 crore as central banks worldwide stepped up buying amid dollar uncertainty and investors turned to the metal as a safe haven.