Current account deficit may increase in Q2 FY26 on tariff woes: India Ratings
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India's current account deficit in 1QFY26 was the lowest in Q1 (FY23-FY25) | Credits: Shutterstock
Current account deficit may increase in Q2 FY26 on tariff woes: India Ratings
India's current account deficit is projected to reach $10 billion in 2QFY26, driven by US tariffs. The deficit, which was $2.4 billion in 1QFY26, reflects challenges in exports, particularly in labor-intensive sectors. While global trade remains strong, India's merchandise exports are expected to fall, with imports increasing due to domestic demand.
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The deficit, which was $2.4 billion in 1QFY26, is affected by US tariffs on Indian goods. While global trade remains resilient, India's exports are likely to decrease, with imports increasing due to domestic demand.
India's current account deficit in 1QFY26 was the lowest in Q1 (FY23-FY25) | Credits: Shutterstock
India Ratings and Research (Ind-Ra) today said it expects current account deficit (CAD) to remain at a three-quarter high of around $10 billion (1% of GDP) in Q2 FY26 due to tariff concerns.
“It returned to a deficit of USD2.4billion (0.2% of GDP) in 1QFY26. CAB was in a deficit of USD8.7 billion (0.9% of GDP) in 1QFY25 and had a surplus of USD13.5 billion in 4QFY25 (1.3% of GDP). The current account deficit in 1QFY26 was the lowest in 1Q (FY23-FY25),” India ratings said today.
“The global trading activity remained resilient, despite the unprecedented uncertainty and volatility caused by the announcement of reciprocal tariffs by the US in early April 2025. The global goods trade grew 3.9% yoy during 1QFY26, remaining more than double of the average growth of 1.7% yoy during 1QFY23-4QFY25,” the agency added.
“The pause in the tariff order thereafter appears to have given some relief and could have led to pre-emptive orders, in view of the impending changes in trade policy. Nevertheless, the global economic activity has showcased surprising strength,” it said.
The agency pointed out that the punitive tariffs of around 50% on India by the US, which have been implemented since end-July 2025, makes India among the most tariffed countries after Brazil. "India’s competitors such as Thailand, Vietnam, China, Malaysia, etc., are better placed with lower tariffs. This would impact our labour-intensive industries such as leather, footwear, textiles, gems & jewellery and shrimp,” it said.
“Ind-Ra therefore expects the merchandise exports to moderate to a three-quarter low of around USD110 billion in 2QFY26. Merchandise imports, however, are expected to increase to around USD189 billion in 2QFY26, due to a steady domestic demand,” it pointed out.
The agency said it expects the goods trade deficit to decline 5.9% yoy to around USD78 billion in 2QFY26. “While goods trade activity has fared relatively well, the impact of the unprecedented global uncertainty has been felt on the services activity, which have been outside the gambit of tariffs,” it adds.
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“The global services trade volume growth slowed to 5.0% during 4QFY25, roughly half of the pace recorded in the past couple of years. The global services PMI recovered to 53.4 in August 2025 from 51.8 in June 2025, 32 months of expansion. Ind-Ra expects the services trade surplus to increase to around USD50 billion in 2QFY26 (1QFY26: USD47.9 billion),” says Paras Jasrai, Economist & Associate Director, Ind-Ra.