India's Current Account Deficit Shrinks to 0.2% of GDP in Q1 FY 2025-26
India's current account deficit contracted sharply to 0.2% of GDP in the first quarter of FY 2025-26, down from 0.9% in the same period last year, marking a significant improvement in the country's external sector performance. The Reserve Bank of India disclosed this development in its October 2025 Monetary Policy Report, highlighting the strengthening of India's balance of payments position.
The substantial narrowing of the current account deficit reflects the robust performance of India's services sector and the continued strength of remittance inflows from overseas Indian workers. Services exports maintained their upward trajectory with double-digit growth rates, while remittances reached $35.3 billion in the first quarter, reinforcing India's position as the world's largest recipient of private remittances.
Services Sector Drives External Balance
India's services exports have emerged as a key driver of the improved current account position. The sector continued its strong performance with double-digit growth in Q1 FY 2025-26, building on the momentum from previous quarters. This growth encompasses various service categories including information technology, business process outsourcing, financial services, and professional services.
The services sector's contribution to India's export basket has grown substantially over the years, providing a crucial buffer against merchandise trade fluctuations. Real exports of goods and services combined grew 6.3% in Q1 FY 2025-26, with services exports playing a dominant role in this expansion.
The sustained growth in services exports reflects India's competitive advantages in skilled services delivery, technological capabilities, and cost effectiveness. These factors have helped Indian service providers maintain their market positions despite global economic uncertainties and changing trade dynamics.
Remittance Flows Remain Strong
Private remittances to India reached $35.3 billion in the first quarter of FY 2025-26, demonstrating the continued importance of overseas Indian workers to the domestic economy. These flows represent a stable source of foreign exchange earnings and provide crucial support to millions of Indian households.
The strength of remittance inflows reflects several factors including the large Indian diaspora across various countries, their integration into diverse economic sectors, and the resilience of global labor markets where Indians are employed. Remittances also benefit from improved digital payment infrastructure and formal channels that facilitate money transfers.
India's status as the world's largest recipient of private remittances underscores the global presence of Indian workers and their families' continued connections to the home country. These flows provide stability to India's external sector by offering a relatively predictable source of foreign exchange.
Merchandise Trade Performance
While services exports drove the current account improvement, merchandise trade also showed resilience despite global uncertainties. India's merchandise exports increased 2.5% during April-August 2025, while imports grew at a marginally lower rate of 2.1%. This modest trade balance contributed to the overall current account position.
The merchandise trade performance occurred against the backdrop of global trade uncertainty, with various economies facing supply chain disruptions and shifting trade patterns. Despite these challenges, Indian exporters managed to maintain growth in their overseas sales, demonstrating adaptability to changing market conditions.
Real imports of goods and services grew 10.9% in Q1 FY 2025-26, indicating strong domestic demand and economic activity. The growth in imports, while higher than exports, was effectively offset by the strong performance in services exports and remittances.
Foreign Direct Investment Trends
India's appeal as an investment destination remained strong during the period, with gross Foreign Direct Investment inflows reaching $37.7 billion during April-July 2025. Net FDI inflows stood at $10.8 billion, demonstrating continued investor confidence in India's economic prospects.
The FDI inflows were led by investments from Singapore, the United States, Mauritius, UAE, and the Netherlands, which together contributed 76% of total foreign direct investment. This diversified source of investment reflects India's engagement with multiple economies and investment corridors.
These investment flows provide not only foreign exchange but also technology transfer, employment generation, and industrial development. The sustained FDI inflows indicate that international investors view India as offering attractive opportunities despite global economic volatility.
Economic Policy Context
The improvement in India's current account position occurred alongside broader economic policy measures and structural reforms. The Reserve Bank of India maintained its repo rate at 5.50% with a neutral monetary policy stance, balancing growth support with financial stability considerations.
The RBI revised India's GDP growth forecast for FY 2025-26 upwards to 6.8% from the earlier estimate of 6.5%, reflecting confidence in domestic economic momentum. Real GDP grew 7.8% in Q1 FY 2025-26, marking the fastest pace in seven quarters and driven by strong investment and consumption.
Consumer price inflation remained well-controlled, with the RBI lowering its CPI inflation forecast for FY 2025-26 to 2.6% from 3.1%. The favorable inflation environment, supported by good monsoon conditions and effective supply management, created conducive conditions for sustained economic growth.
GST Reforms and Consumer Impact
The GST rate rationalization implemented from September 22, 2025, contributed to the overall economic environment by simplifying tax structures and reducing consumer prices. These reforms directly impacted approximately 11.4% of the Consumer Price Index basket across various product groups.
The tax rationalization measures represented part of the government's ongoing efforts to streamline India's indirect tax system and reduce compliance burdens on businesses. Lower consumer prices resulting from these reforms supported domestic consumption while contributing to the favorable inflation outlook.
These structural policy measures, combined with the external sector improvements, reinforced the positive economic trajectory and supported confidence in India's medium-term growth prospects.
Financial Market Performance
India's financial markets reflected the positive economic fundamentals, with equity markets maintaining an upward trajectory despite periodic volatility. The BSE Sensex increased 3.9% during April-September FY 2025-26, while broader market indices outperformed the benchmark.
The BSE MidCap index gained 7.7% and the BSE SmallCap index rose 12.1% during the same period, indicating broad-based investor confidence across market segments. These market movements occurred despite short periods of volatility arising from trade policy uncertainty and geopolitical tensions.
The financial market performance complemented the external sector improvements by maintaining favorable conditions for capital formation and investment flows. Strong equity market performance also supported wealth creation and consumer confidence.
Implications for Economic Outlook
The significant improvement in India's current account deficit position strengthens the country's external sector resilience and provides greater policy flexibility. A lower current account deficit reduces dependence on volatile capital flows and enhances macroeconomic stability.
The strong services exports and remittance flows provide sustainable sources of foreign exchange earnings that are less susceptible to commodity price fluctuations or global trade disruptions. This diversification of external earnings sources enhances India's economic resilience.
The combination of improved external balance, controlled inflation, strong growth momentum, and supportive policy measures creates a favorable foundation for sustained economic expansion. These developments position India well to navigate global economic uncertainties while maintaining domestic growth momentum.
The narrowing current account deficit, supported by robust services performance and strong remittance flows, represents a positive development for India's external sector stability and overall economic health. This improvement occurred alongside favorable domestic economic indicators, reflecting the resilience and adaptability of India's economic structure in responding to both domestic and global challenges.
