India’s Services Boom Cushions Trade Deficit, But Merchandise Exports Remain Weak

The country’s current account deficit (CAD) narrowed sharply to $2.4 billion (0.2% of GDP) in Q1 FY26, significantly lower than the $8.6 billion deficit (0.9% of GDP) recorded in Q1 FY25.

The outcome was also well below ICRA’s earlier forecast of 0.7 per cent of GDP, primarily aided by stronger-than-expected remittances and a higher services trade surplus.

Source : Freepik

While merchandise exports are projected to remain under pressure due to US tariffs, India’s services trade surplus is expected to hit a record $205–207 billion in FY26, a report showed on Wednesday.

The country’s current account deficit (CAD) narrowed sharply to $2.4 billion (0.2 per cent of GDP) in Q1 FY26, significantly lower than the $8.6 billion deficit (0.9 per cent of GDP) recorded in Q1 FY25.

The outcome was also well below ICRA’s earlier forecast of 0.7 per cent of GDP, primarily aided by stronger-than-expected remittances and a higher services trade surplus.

Earnings from invisibles rose 19.9 per cent (year-on-year) to $66.1 billion in Q1 FY26, offsetting the merchandise trade deficit of $68.5 billion.

ICRA cautions that the CAD is set to widen in Q2 FY26 to $13–15 billion (1.5 per cent of GDP), driven by a sharp expansion in the merchandise trade deficit.

“The recently imposed 50 per cent US tariff on Indian goods is expected to exert significant pressure on India’s exports, particularly textiles, diamonds, seafood, and leather.

Should these tariffs persist through the fiscal year, ICRA expects India’s CAD to exceed 1 per cent of GDP in FY26, compared with 0.6 per cent in FY25, the report projected.

India witnessed net financial inflows of $8.1 billion in Q1 FY26, after outflows in H2 FY2025. However, reserve asset accretion moderated to $4.5 billion from $8.8 billion in Q4 FY25, the ICRA report mentioned.

Forex reserves stood at $691 billion (as on August 22). The INR depreciated 3.2 per cent against the USD in 2025 (till September 1).

ICRA expects the USD/INR to trade in the 87.0–89.0 range in the near term.

Commenting on the outlook, the report said the trajectory of the CAD will hinge critically on tariff-related developments with the US.

(Disclaimer: This report has been published as part of the auto-generated syndicate wire feed. Apart from the headline, no editing has been done in the copy by ABP Live.)