India’s Current Account Deficit to Stay Elevated in FY26 Amid Tight Global Trade Policies: JM Financial Report

New Delhi, January 4 — India’s Current Account Deficit (CAD) is expected to remain high in FY26 due to the stringent global trade policies, as per a report by JM Financial. The report points out that the country’s import levels have consistently exceeded exports, resulting in an increasing trade deficit. The ongoing sluggishness in export growth is likely to contribute to the sustained elevation of India’s CAD.

The report suggests that the global supply chain adjustments driven by US President-elect Donald Trump’s trade policies will have a disproportionate impact on India, with exports expected to face greater challenges than imports. As a result, it predicts that India’s exports will lag behind imports well into 2025.

In November 2024, India’s trade deficit widened to USD 37 billion, a significant surge compared to the monthly average of USD 23.5 billion recorded during the first seven months of FY24. This growing deficit is attributed to the reorganization of global supply chains, influenced largely by Trump’s trade policies. The realignment of these chains is expected to affect India’s exports more severely, contributing to a sustained imbalance in trade flows.

The report forecasts that the CAD for FY25 will likely hover around 1.5-1.6 percent of GDP, with the deficit remaining elevated in FY26 at approximately 1.4-1.5 percent, depending on the future trajectory of US trade policies. This prolonged deficit is expected to exert downward pressure on the Indian rupee (INR), which could lead to depreciation.

Despite these challenges, the report also highlights a positive aspect of India’s economic outlook, particularly regarding fiscal consolidation efforts. These measures are expected to help keep bond yields stable. The Indian government is likely to comfortably meet its fiscal deficit target of 4.5 percent for FY26. However, this emphasis on fiscal discipline has led to reduced capital expenditure (capex) in FY25, particularly during the election period, which saw a slowdown in the intensity of capital investments.

Looking ahead, the government is expected to shift its focus toward reducing the national debt-to-GDP ratio, rather than solely concentrating on the fiscal deficit target. This adjustment in fiscal strategy, in tandem with a potential rate-easing cycle, is anticipated to stabilize bond yields. The report projects that bond yields will average 6.5 percent in 2025, with fluctuations ranging between 6.2 and 6.8 percent.

In conclusion, while India faces persistent challenges from a widening CAD and trade imbalances, the country’s commitment to fiscal prudence and its stable bond market provide some cause for optimism in the years to come.