Middle East Crisis to Weight on Trade Deficit and Current Account Deficit

Chennai: The Middle East crisis will likely increase the import bill while exports will continue to be affected, resulting in an increase in the trade deficit and current account deficit. But the services trade surplus will help CAD remain manageable.

India’s current account deficit (CAD) widened to $13.2 billion in the third quarter of FY26 from $11.3 billion in the same quarter of the previous year; 1.3 percent of GDP compared to 1.1 percent in the same quarter last year. But that figure narrowed from $14.1 billion in the previous quarter, according to Crisil.

The widening of the CAD in the December-end quarter was due to the worsening of the goods trade deficit to $93.6 billion from $79.3 billion in the same quarter last fiscal year. Further deterioration in the CAD was limited as the services trade surplus increased from $51.2 billion to $57.5 billion.

But on a cumulative basis, India’s current account deficit in FY26 so far through the third quarter stands at $30.1 billion or 1 per cent of GDP; This represents a slight contraction from $36.6 billion, or 1.3 percent of GDP, in the same period in FY25. While the goods trade deficit widened, it was offset by an increase in the surplus in services trade.

Crisl forecasts the current account deficit to widen to 1.2 per cent of GDP for FY27, while it is projected to be 0.8 per cent of GDP in FY26. Geopolitical uncertainties and weak growth in global trade are likely to put pressure on exports, despite some relief from the reduction of US tariffs.

Imports face significant upside risk, given that crude oil prices remain elevated should uncertainty persist in the Middle East. Therefore, together these could put pressure on the goods trade deficit. But a healthy services trade surplus should keep CAD manageable.

Although net foreign portfolio and other investment outflows in the third quarter of this fiscal year were significantly lower than in the same quarter of the last fiscal year, outflows in foreign direct investment increased.

Meanwhile, India’s foreign exchange reserves fell to $24.4 billion in the third quarter from $37.7 billion in the same period of the previous year. As a result, the country’s foreign exchange reserves decreased from $700.2 billion as of September 26, 2025 to $696.6 billion as of December 26, 2025. However, as of February 20, 2026, foreign exchange reserves increased to 723.6 billion dollars.