India’s Q4 FY25 BoP (balance of payments) data is unique in many respects.

• The current account balance printed a surplus, at 1.3% of GDP (USD 13.5 bn). This is not just higher than the market consensus expectation of 0.9%, but it is the highest in 70 quarters (barring the COVID-triggered surpluses seen during Q1-Q2 FY21).
• In contrast, the capital account ratio registered a deficit of 0.5% of GDP (USD 5.6 bn) after witnessing a record high deficit of 2.6% in Q3 FY25. This is the first consecutive outflow under the capital account that India has witnessed since the 1991 economic liberalisation.
• On a net basis, BoP registered a surplus of 0.9% of GDP (USD 8.8 bn). While this represents a sharp reversal from a deficit of 3.7% of GDP (USD 37.7 bn) in the Q3 FY25 quarter, it shows moderation compared to a healthy surplus of 3.2% (USD 30.8 bn) seen in Q4 of FY24.

For the full financial year, the current account in FY25 clocked a moderate deficit of 0.6% of GDP (marginally better than our forecast of 0.7%) with an accompanying deficit of USD 5 bn on BoP (marginally wider compared to our deficit forecast of USD 2 bn). While the current account deficit is marginally better than the FY24 outturn of 0.7%, the BoP position shows stress compared to a healthy surplus of USD 64 bn in FY24.

Key granular highlights of Q4 FY25 (USD value details in the table below)

• Invisibles recorded a sharp annualised improvement, rising from 5.9% of GDP in Q4 FY24 to 7.2% in Q4 FY25. This was driven by:
  1. Services trade surplus scaling a record high of 5.2% of GDP
  2. Remittances recording a minor improvement from 3.0% of GDP in Q4 FY24 to 3.1% in Q4 FY25.
  3. Outflows under income balance are moderating by 40 bps on an annualised basis to 1.2% of GDP.
• The merchandise trade deficit widened by 40 bps on an annualised basis to 5.8% of GDP. This was on account of a relatively faster moderation in merchandise exports vis-à-vis imports.
• The deficit under the capital account was primarily on account of outflows under banking capital and portfolio investments. In contrast:
  1. Inflows under external loans at USD 5.5 bn witnessed a mild annualised improvement of 10 bps to 0.5% of GDP.
  2. While Net FDI flows were anaemic at a minuscule level of USD 0.4 bn, it marked an improvement after witnessing two consecutive quarters of outflows.

Outlook 

The current account surplus in the final quarter of the financial year reflects favourable seasonality. However, the magnitude of surplus in Q4 FY25 exceeded market expectations. The improving trend in the services trade surplus in the post-COVID era is a testament to the structural change that India has witnessed as a fast-emerging global centre for business services.

Having said that, the capital account outturn has been of concern. The dual risk from geoeconomic and geopolitical uncertainty has weighed upon foreign investment inflows. Notably, Net foreign investments (FDI+FPI) plummeted to just 0.1% of GDP in FY25, the lowest since India’s 1991 economic reforms.

These developments hold some cues for FY26. The US-triggered uncertainty on global trade will have dual ramifications:

• The final US tariff structure at a country-wide level is yet to be decided. In addition, there is no confirmation on how sectoral tariffs would be deployed.
• Progress on bilateral trade deals with the US has been slow. With the 90-day tariff window set to expire soon on July 9^th, there’s just one deal – the US-UK FTA, which has been announced. In recent days, President Trump has hinted at the possibility of the announcement of separate trade deals with India and China shortly.
• In addition, Trump’s proposal to tax remittances (if passed) could provide an additional minor setback to the current account flows tied to the US. 

Having said that, there are a few silver linings as well. 

• Merchandise exports have been broadly resilient so far despite elevated global uncertainties. Meanwhile, service exports continue to display strength and are likely to remain relatively immune to protectionist sentiment for now.
• Despite heightened geopolitical tensions, the anticipation of a global economic slowdown amidst an ample supply of crude oil could keep prices in check. Notwithstanding the gyrations seen this month on account of the Israel-Iran war, the price of Brent has averaged at USD 68 pb in Q1 FY26, lower than USD 76 pb in Q4 FY25 and USD 85 pb in Q1 FY25.

On a net basis, we retain our FY26 current account balance and BoP forecast of -0.8% of GDP (USD-33 bn) and 0.2% (USD 10 bn) respectively for now. The same will be reviewed after clarity emerges on the India-US BTA.

Table 1: Highlights of India’s trade balance*

Note: Annual figures have been rounded off.