Q2FY26 Current Account Deficit modest at 1.2% of GDP

24 Dec 2025 , 03:02 PM

Q2FY26 CAD MODEST AT $12.3 BILLION

After a current account surplus in Q4FY25 and a marginal current account deficit (CAD) of $2.70 Billion (revised up from $2.40 Billion) in Q1FY26, second quarter was challenging. However, at $12.3 Billion, the CAD in Q2FY26 is still manageable. As a share of GDP, the CAD for Q2FY26 is just about 1.3% and the combined CAD for H1FY26 at $15 Billion is just 0.8% of GDP. However, bulk of the CAD pressure will be felt in the third and fourth quarter of FY26, when the US tariffs start pinching. Merchandise trade deficit touched record $41.65 Billion in October 2025. Economy must brace for a deeper impact on CAD in Q3 and Q4 of FY26.

HOW CAD PANNED OUT OVER LAST 12 QUARTERS

Here is a quick look at the CAD / CAS history of last 12 quarters.

Quarter	Current Account Balance
Quarter Ended September 2022	$(30.89) Billion
Quarter Ended December 2022	$(16.82) Billion
Quarter Ended March 2023	$(1.34) Billion
Quarter Ended June 2023	$(8.95) Billion
Quarter Ended September 2023	$(11.26) Billion
Quarter Ended December 2023	$(10.42) Billion
Quarter Ended March 2024	$4.59 Billion
Quarter Ended June 2024	(8.60) Billion
Quarter Ended September 2024	$(16.70) Billion
Quarter Ended December 2024	$(11.30) Billion
Quarter Ended March 2025	$13.50 Billion
Quarter Ended June 2025 #	$(2.70) Billion
Quarter Ended September 2025	$(12.30) Billion

Data Source: DGFT / RBI (# Revised up by $300 million)

When the US imposed penal tariffs on India, the expectation was that the current account deficit could climb to well beyond 2% of GDP in the first half. However, most of the tariff impact had been back-ended, so the full impact will only be felt in Q3 and Q4, assuming that the trade deal with the US gets further delayed.

For the third and fourth quarters, the overall current account deficit is expected to stay above 2.5% of GDP, so the full year CAD/GDP ratio could inch closer to 2.0%. However, there are 3 open questions. Firstly, will the rupee weaken further? Secondly, will oil prices remain tepid or move up? Thirdly, how quickly will India and US move on the trade deal?

CAD BASKET IN SEPTEMBER 2025 QUARTER (Q2FY26)

Here is an itemized comparison of Q2FY26 CAD with Q2FY25 CAD.

Pressure on Current Account	Q2 FY26 Break-up	Q1 FY25 Break-up	Boost to Current Account	Q2 FY26 Break-up	Q2 FY25 Break-up
Trade Deficit	($87.40 bn)	($88.50 bn)	Services Surplus	+$50.90 bn	+$44.50 bn
Primary A/C – Interest	($12.20 bn)	($9.20 bn)	Secondary Income	+$36.40 bn	+$32.40 bn
Negative Thrust on CA	(-$99.60 bn)	(-$97.70 bn)	Positive Thrust on CA	+$87.30 bn	+$76.90 bn
		Current Account Surplus / (Deficit)		$(12.30) bn	$(20.80) bn

Data Source: RBI

Here are quick thoughts on CAD basket for Q2FY26.

• September 2025 quarter merchandise trade deficit at $(87.40) Billion is sharply higher than the sequential quarter but tad lower than the year-ago quarter. While POL deficit is flat, goods trade deficit has arisen from electronic goods, machinery, and gold imports. However, the situation could aggravate in Q3, since US exports have fallen sharply.
  
• Let us now turn to the current account boosters. For Q2FY26 services trade surplus at $50.90 Billion was 14.4% higher than in Q2FY25. Secondary income, representing remittances from abroad, is higher 12.3% yoy at $36.40 Billion.

Few positive developments are visible in Q2FY26. Trade deficit is flat while services surplus and remittances are sharply higher. However, interest and dividend payouts abroad have gone up; which partially offsets the gains on CAD.

CAD BASKET IN FIRST HALF (H1-FY26)

Here is the break-up of the current account for H1FY26 and how it compares with H1FY25.

Pressure on Current Account	H1 FY26 Break-up	H1 FY25 Break-up	Boost to Current Account	H1 FY26 Break-up	H1 FY25 Break-up
Trade Deficit	($156.30 bn)	($148.30 bn)	Services Surplus	+$98.80 bn	+$84.20 bn
Primary A/C – Interest	($25.00 bn)	($20.00 bn)	Secondary Income	+$67.50 bn	+$58.80 bn
Negative on CA	(-$181.30 bn)	(-$168.30 bn)	Positive on CA	+$166.30 bn	+$143.00 bn
		Current Account Surplus / (Deficit)		$(15.00) bn	$(25.30) bn

Data Source: RBI

Here are quick thoughts on CAD basket for H1FY26.

• It has been a mixed first half. While the overall H1 deficit is lower than last year, the goods trade deficit and the interest payouts are higher. However, that is more than compensated by a 17.3% spike in services surplus and 14.8% rise in inward remittances.
  
• The sharply higher remittances can be attributed to weakening of the rupee as it automatically gives NRIs higher yields. The services trade has not been impacted by US tariffs, unlike the goods trade, which is the good news!

As of the end of the first half of FY26, the CAD at $15 billion is sharply lower than the comparable first half of last year. However, the real pressure will be visible in H2FY26.

CAD OUTLOOK FOR FY26

Under stress conditions, the CAD in the second half of FY26 could range from between 2.5% and 2.7% of GDP. That means, the full year CAD should be closer to 2.0% of GDP in a stress scenario. This is based on the assumption that the rupee does not weaken further and the pressure of tariffs by the US does not aggravate further. After all, the 50% tariffs are going to impact nearly $50 Billion worth of Indian exports to the US.