India's CAD to hit 1.7% of GDP in FY26, says Union Bank report

India's current account deficit (CAD) is set to rise to 1.7% of GDP in FY26, says a Union Bank report, citing global trade tariffs. Risks include oil price volatility, while a potential US-India trade deal could offer relief.

India's current account deficit (CAD) is expected to rise to 1.7 per cent of GDP in the current financial year FY26, higher than the bank's earlier projection of 1.2 per cent, according to a report by Union Bank of India. The rise is mainly attributed to persistent global trade tariff pressures that continue to keep the trade deficit elevated despite weak demand and lower commodity prices. It stated, "We expect a rise in current account deficit to 1.7 per cent of GDP in FY26, as global trade tariff pressures continue to keep trade deficit elevated".

Understanding the Current Account Deficit

A current account deficit (CAD) occurs when a country's total value of imports of goods, services, and capital is greater than the total value of its exports and other income. It indicates that more money is flowing out of the country than is flowing in.

Factors Influencing the Deficit

The report highlighted that the trade deficit is likely to witness seasonal pressures due to festive demand effects. Lower commodity prices, especially oil, may, however, help limit the overall impact.

The bank noted that subdued oil prices could support India's external balance as the country's current account is highly sensitive to fluctuations in crude prices. Every USD 10 per barrel move in oil prices affects the annual current account balance by close to USD 15 billion. The report added that this sensitivity means lower oil prices are likely to have a "salutary effect" on India's trade dynamics.

Risks and Potential Mitigating Factors

However, risks to the current account outlook have emerged from commodity price volatility, particularly crude oil, and the possibility of prolonged export weakness if the US-India trade deal impasse continues.

India-US Trade Deal Nears Finalization

The report pointed out that the India-US Bilateral Trade Agreement (BTA) is nearing finalization, potentially by late November. The agreement is expected to cut tariffs from 50 per cent to 15-16 per cent. While the near-term impact may be limited, the deal is expected to strengthen India's export base over time and partially offset trade balance pressures in the coming quarters.

Record Highs in Trade and Gold Deficits

As per data, India's merchandise trade deficit widened to a record high of USD 41.68 billion in October 2025, compared to USD 32.15 billion in the previous month. The reading surpassed market expectations, marking a significant turning point in the country's trade balance.

The gold deficit also surged to record levels in October as festive and wedding-season demand, combined with pent-up buying after subdued imports earlier in the year, pushed gold inflows sharply higher.

While gold imports in November are expected to moderate in volume, they are likely to remain elevated in value due to strong investment demand despite high prices. The report stated that gold demand is set to stabilise after the festive season but will likely stay elevated compared to earlier months. (ANI)

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