The CAD of India expanded to $4.2 billion in the first quarter of FY2026‑27, equal to 0.5% of GDP. The rise follows a higher merchandise trade gap and shifts in capital flows, as reported by the RBI on 1 September 2026.
Key Developments (Q1 FY2026‑27)
- CAD widened to $4.2 bn (0.5% of GDP) from $3.4 bn (0.4% of GDP) a year earlier.
- Merchandise trade gap rose to $86.1 bn from $68.9 bn.
- Net services receipts increased to $51.6 bn (up from $47.9 bn).
- Primary income outflow fell to $10.5 bn from $13.3 bn, reflecting lower investment‑income payments.
- Secondary income (mainly remittances) surged to $42.9 bn from $33.2 bn.
- Net FDI rose to $6.1 bn (up from $5.2 bn).
- FPI recorded a net outflow of $9.6 bn, reversing the previous year’s inflow.
- Non‑resident deposits inflow fell to $2.8 bn and ECB inflows slipped to $3.3 bn.
- ECBs declined from $4.4 bn to $3.3 bn.
- Foreign exchange reserves dropped by $8.1 bn on a balance‑of‑payments basis.
Important Facts
The widening CAD is mainly driven by a larger trade gap in goods, while stronger services exports and higher remittances provide a partial cushion. The decline in primary‑income outflow shows reduced interest payments to foreign investors. Capital account dynamics reveal a mixed picture: FDI remains positive, but FPI outflows and lower non‑resident deposits increase vulnerability.
Exam Relevance
Understanding the CAD is essential for GS‑III (Economy) as it reflects external sector health, exchange‑rate pressure, and policy choices. The role of RBI in publishing balance‑of‑payments data links to fiscal‑monetary coordination. Trends in FDI and FPI are frequently asked in questions on capital flows, external debt sustainability, and policy responses.
Way Forward
- Policy focus on narrowing the merchandise trade gap through export promotion and import substitution.
- Maintain the growth momentum of high‑value services exports, especially IT and transport services.
- Encourage stable FDI while managing FPI volatility via macro‑prudential tools.
- Strengthen monitoring of external commercial borrowings to avoid debt distress.
- Use foreign exchange reserves prudently to smooth exchange‑rate fluctuations and support external payments.
These steps can help contain the CAD, safeguard external stability, and support overall economic growth.