India's external sector faces risks from oil prices, West Asia conflict

India's external sector outlook is manageable but faces rising risks from West Asia's geopolitical tensions, which could elevate oil prices and widen the CAD, a Yes Bank report warns. The BoP deficit widened to USD 24.4 billion in Q3 FY26.

India's external sector outlook remains broadly manageable but faces rising risks from geopolitical developments in West Asia that could push up crude oil prices and widen the current account deficit (CAD), according to a recent research note by Yes Bank.

BoP Deficit and Current Account Performance

The report noted that India recorded a Balance of Payments (BoP) deficit of USD 24.4 billion in Q3 FY26, wider than the USD 10.9 billion deficit in the previous quarter, largely due to capital account outflows. Despite the deterioration in BoP, the current account deficit narrowed marginally to USD 13.2 billion (1.3% of GDP) from USD 14.1 billion in Q2, supported by strong services exports and remittance inflows, which offset a widening merchandise trade gap driven by higher gold imports.

Future Outlook Hinges on Oil Prices

Looking ahead, the outlook for India's external sector will depend heavily on global oil price movements linked to the ongoing West Asia conflict. Brent crude has already risen to USD 82-84 per barrel from about USD 65 earlier, raising concerns over import costs and the trade deficit. The report noted, "The extent of hurt to India's external sector and overall macro fundamentals is likely to hinge on the duration of the conflict and thus, the longevity of the firmness of the oil prices." Under its baseline scenario, where oil prices average USD 65 per barrel, the report projects India's CAD at around 1.1% of GDP in FY27. However, if oil prices remain elevated at about USD 75 per barrel, the CAD could widen to 1.5% of GDP.

Capital Flow and BoP Projections

The report also expects capital flows to recover to about USD 33 billion in FY27, compared with an estimated USD 6 billion in FY26, assuming global financial conditions stabilise and India's growth outlook remains strong. As a result, the overall BoP deficit is projected to narrow to about USD 16.3 billion in FY27, improving from an estimated USD 34 billion deficit in FY26. The report, however, cautioned that the trajectory of India's external balances will remain sensitive to oil prices and the duration of geopolitical tensions, which could significantly influence import costs and capital flows.

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