India’s current account deficit narrowed sequentially in Q3 FY25 to 1.1% of GDP (i.e., USD 11.5 bn) from 1.8% in Q2 FY25 (i.e., USD 16.7 bn). However, on the other hand, the Balance of Payments slipped into a deficit of 3.8% of GDP (i.e., USD 37.7 bn) in Q3 FY25 compared to a healthy surplus of 2.0% (i.e., USD 18.6 bn) in Q2 FY25.

Key granular highlights 

• Sequential narrowing in current account deficit was owing to a moderation in merchandise trade deficit to 7.9% of GDP in Q3 FY25 from 9.0% in Q2. A relatively sharper decline in imports vis-à-vis exports led to this outcome. 
  1. Exports, as a % of GDP stood at 10.9% in Q3 FY25 – marking the lowest level in 4 years. 
  2. In contrast, imports as a % of GDP stood at a 3-quarter high of 19.6% in Q3 FY25, predominantly owing to higher inbound shipments of precious metals post the Budget duty relief as well as electronic items during the festive season. 

• In contrast, invisibles moderated sequentially to 6.7% of GDP in Q3 FY25 from 7.2% in Q2 FY25. This was predominantly on account of a close-to-record outflow under the income category, followed by a mild moderation in the pace of remittances.
  1. Meanwhile, services trade continued to display resilience, with the surplus accelerating to a record high of 5.1% of GDP in Q3 FY25.
  2. Services exports, at 10.3% of GDP, also stood at a record high, continuing to benefit from a structural pick-up in the export of business services in the post-COVID era.

• Capital account recorded a deficit of 2.7% of GDP (USD 26.8 bn) in Q3 FY25 – the first in 11 quarters and the widest on record. Among the internals -
  1. All categories witnessed a net outflow except for external loans
  2. Within Foreign Investments, both FDI and FPI inflows were negative together – the first such occurrence in history. 
  3. Foreign investments posted a record outflow of 1.4% of GDP in Q3 FY25, reflecting the impact of heightened global uncertainty owing to geopolitics as well as Trump’s coming to power in the US (and associated risks of trade protectionism). This is likely to have been exacerbated further by the deterioration in India’s growth-inflation balance over Q2-Q3 FY25. 

Outlook

In the quarter ending Dec-24, India’s capital account outflow was the worst on record, and this transpired in the absence of any major global economic crisis/event. Having said that, perhaps the continued build-up of geopolitics, ascendancy of Trump to power, and risk of escalation of trade protectionism coupled with domestic growth concerns appear to have congregated in their impact in the quarter.

For FY25, we expect the run rate so far to translate into an overall BoP in a deficit position of USD 2 bn vis-à-vis a surplus of USD 64 bn in FY24. The current account deficit position is expected to be largely unchanged at USD 27 bn in FY25 vs. USD 26 bn in FY24. 

For FY26, the situation remains fairly dynamic, especially with the contours of the US-led tariff regime remaining unclear as yet. Besides, US intervention and any change in policy for the issuance of work visas could have a direct impact on India. Overall, key factors that could weigh in include -

1. The announcements related to reciprocal tariffs by the US are expected on 2nd Apr-25. We remain hopeful that India, via its bilateral negotiations, may be able to avert a full-blown impact. But, indirect impact via dumping of goods by other nations, may still need to be tackled. 
2. Softness in crude prices (the average price of Brent has fallen from USD 85 PB in Mar-24 to USD 72 PB in Mar-25) could be sustained on account of – 1) the US’s intervention in diffusing Russia-Ukraine war/ Middle East crisis 2) US support for expanding shale capacity 3) OPEC’s supply expansion in the near term and 4) Concerns of growth slowing down in the US. This should benefit net oil-importing countries like India.
3. The other silver lining we see as of now is the prevailing strength in the services trade surplus, which in recent quarters has been able to offset as much as two-thirds of the merchandise trade deficit. However, this element of strength could potentially face some pressure over the medium term if laws related to work visas in the US are tightened, thereby having some adverse impact on India’s software receipts.

Amidst several known unknowns for FY26, we retain our current account deficit and BoP forecast of -1.3% of GDP and USD 3 bn, respectively, for now.

Table 1: Key items within India’s BoP