India's Current Account Deficit May Hit 1.5% Of GDP By June-End

India's current account deficit for the second quarter of CY26 is likely to be around 1.5% of gross domestic product by June-end, according to a report by HSBC Global Investment Research.

The report also states that the capital account and the overall balance of payments are expected to remain in deficit for the quarter.

The external position of India remains under pressure, but debt inflows picked up in June, and the situation is expected to improve as non-resident Indian deposits under the Reserve Bank of India's foreign exchange scheme begin to flow through later in the third quarter.

India's goods trade deficit widened modestly to $30.4 billion in June from $28.2 billion in March. The net oil trade deficit remained unchanged at $14.5 billion, and the gold trade deficit was flat. However, the net non-oil, non-gold trade deficit widened to $15 billion.

Non-oil export growth was a positive aspect, expanding for a third consecutive month with average growth of about 8% month on month. This was helped by lower US tariffs, which created a window to accelerate shipments. Exports to the US grew an average of 5% month on month, with engineering goods, electronics, gems, and jewellery being the key export categories reporting strong sequential growth in Q2 2026.

The inflation outlook is also a concern, with June CPI inflation coming in at 4.4% year on year, higher than the previous month. Excluding gold and silver, headline CPI was at 3.6% year on year.

Food inflation rose higher than anticipated, led by a broad-based rise in cereals, protein items, and edible oil. Vegetable prices deflated in sequential terms despite a sharp rise in tomato, chilli, and garlic prices.

The report notes that El Niño conditions are likely to intensify further in the months to come, which could keep food prices elevated. Temperatures are trending above normal, and reservoir levels are below those recorded at the same time last year.

The forecast inflation rate for FY27 is nearly 5%. The current account deficit is expected to be around 1.5% of GDP by June-end, which could have implications for India's economic growth.

The report highlights the need for India to be cautious about its external position and to take steps to improve its trade deficit. The country's economic growth is closely tied to its trade performance, and a widening trade deficit could have negative implications for the economy.

In conclusion, India's current account deficit is expected to reach 1.5% of GDP by June-end, with inflation averaging 5% in FY27. The external position remains under pressure, but debt inflows and non-resident Indian deposits are expected to improve the situation in the third quarter. The report highlights the need for India to be cautious about its external position and to take steps to improve its trade deficit.