ECONOMY
Q2 CAD rises sequentially to 1.3% of GDP as US tariffs, FPI outflows hit hard
- IBJ Bureau
- Dec 02, 2025
Worries on the current account front seem to have returned after a phase of comfort. India’s Current Account Deficit (CAD) moderated to 1.3 per cent of GDP in Q2FY26 from 2.2 per cent in the year-ago quarter. But the CAD widened sequentially from 0.2 per cent of GDP in the previous quarter, according to data released by the Reserve Bank of India (RBI) on Monday.
Moreover, a relatively-weaker financial account resulted in a large depletion of $10.9 billion from the foreign exchange (forex) reserves on a balance of payment basis in the July-September quarter of this financial year as against an accretion of $18.6 billion in Q2FY25.
This was the largest depletion of reserves after a $37-billion dwindling seen in Q3FY25. In most other recent quarters, accretion to the forex has been reported.
This shows that the hit to merchandise exports from the US tariffs and outflows of foreign portfolio investment (FPI) are causing some concerns for the current and capital accounts respectively. Merchandise trade deficit in October widened to a record high of $42 billion, as exports fell by 11.8 per cent in the wake of the 50 per cent US tariffs and expensive gold and fertiliser imports. This implies that the CAD may not be benign in the current quarter (Q3FY26).
“Looking ahead, the spike in gold imports in October 2025 is likely to bloat the ongoing quarter’s current account deficit considerably to above 2.5 per cent of GDP. With gold imports unlikely to sustain this surge in the coming months, we expect the monthly merchandise trade deficit figures to ease relative to the levels seen in October 2025. Overall, we foresee India’s current account deficit at a relatively manageable 1.1-1.2 per cent of GDP in FY26,” wrote ICRA Chief Economist Aditi Nayar.
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