India's current account deficit narrows to $12.3 bn in Q2 FY26: RBI

India's current account deficit narrowed sharply to USD 12.3 billion, or 1.3% of GDP, in Q2 FY26, from USD 20.8 billion a year ago. The improvement was driven by a lower trade deficit and a significant rise in net services receipts.

India's current account deficit narrowed sharply to USD 12.3 billion, or 1.3% of GDP, in the second quarter of FY 2025-26, from USD 20.8 billion (2.2% of GDP) in the same quarter a year earlier, according to preliminary balance of payments (BoP) data released by the Reserve Bank of India on Monday.

The merchandise trade deficit moderated to US$ 87.4 billion in Q2, marginally lower than USD 88.5 billion in the corresponding period last year. Exports and imports both grew, but the increase in exports helped contain the deficit.

Key Balance of Payments Components

India's foreign exchange reserves, on a BoP basis, saw a depletion of USD 10.9 billion in Q2, in contrast to an increase of USD 18.6 billion in the same quarter a year earlier, RBI data said.

Investment and Capital Flows

The net inflows of Foreign Direct Investment (FDI) surged to USD 2.9 billion, reversing a net outflow of USD 2.8 billion a year earlier.

Further, the Foreign Portfolio Investment (FPI) showed a net outflow of USD 5.7 billion, contrasting sharply with USD 19.9 billion in net inflows last year.

The net inflows of External Commercial Borrowings (ECBs) totalled USD 1.6 billion, down from USD 5.0 billion in Q2 FY 2024-25 while the net inflows in the NRI Deposits stood at USD 2.5 billion, compared with USD 6.2 billion last year.

Breakdown of Invisibles

Net services receipts rose significantly to USD 50.9 billion, compared with USD 44.5 billion a year earlier, RBI data said. The RBI noted that computer services and other business services remained key contributors to the rise in services exports.

Outflows under the primary income account, largely investment income payments, expanded to USD 12.2 billion, up from USD 9.2 billion in Q2 of FY 2024-25.

Expert Analysis and Outlook

Aditi Nayar, Chief Economist, ICRA said, "While the current account deficit expectedly widened in Q2 FY2026, it undershot our forecast of ~US$ 17 billion primarily on account of a slightly lower goods deficit and stronger-than-expected remittance flows."

"Looking ahead, the spike in gold imports in October 2025 is likely to bloat the ongoing quarter's current account deficit considerably to above 2.5% of GDP. With gold imports unlikely to sustain this surge in the coming months, we expect the monthly merchandise trade deficit figures to ease relative to the levels seen in October 2025," she said.

"Overall, we foresee India's current account deficit at a relatively manageable ~1.1-1.2% of GDP in FY2026."

H1 FY 2025-26 Performance Summary

As per the data released by the RBI, in the first half of FY 2025-26, India's current account deficit fell sharply to USD 15.0 billion (0.8% of GDP) from USD 25.3 billion (1.3% of GDP) a year earlier.

The improvement was supported by a strong rise in net invisibles, which increased to USD 141.3 billion on the back of higher services exports and remittances, RBI said. Net FDI more than doubled to USD 7.7 billion, signalling improved investment sentiment. However, FPI flows reversed, with net outflows of USD 4.1 billion compared to inflows of USD 20.8 billion last year. During the same period, foreign exchange reserves declined by USD 6.4 billion, contrasting with an accretion of USD 23.8 billion in H1 of the previous fiscal. (ANI)

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