New Delhi [India], September 27 : An uptick in non-oil non-gold imports is likely in the coming months as domestic demand expands, at a time when exports could weaken due to mounting tariff pressures.
According to a report by ICICI Bank Global Markets, India's external sector is showing mixed signals, with a resilient current account balance but growing concerns around capital flows and export sustainability.
India's current account deficit (CAD) for Q1FY26 was contained at just 0.2 per cent of GDP (USD 2.4 billion), due to strong services exports and robust remittance inflows.
However, the merchandise trade deficit widened to USD 68 billion from USD 64 billion in Q1FY25, largely due to stronger imports and plateauing goods exports.
Notably, August trade data indicates a significant slowdown in exports to the US, growing just 7 per cent year-on-year compared to 22 per cent in Q1 and 20 per cent in July.
In contrast, exports to non-US markets saw a marginal pick-up at 6.6 per cent YoY, reflecting a shift in demand patterns.
The report added that the CAD is expected to remain benign in FY26, projected at 0.9 per cent to 1.2 per cent of GDP, depending on the scale of tariffs imposed on Indian exports (25 per cent vs. 50 per cent). However, the bias is toward a lower CAD, supported by healthy service sector earnings and a potential rebalancing of trade partners.
Still, downside risks persist, the report highlighted, adding that the recent hike in H1-B visa fees in the US could hurt future services exports and remittances.
On the capital flows side, India continues to face headwinds, with foreign portfolio investment (FPI) inflows remaining weak, especially when compared to other emerging markets like China, South Korea, and Taiwan.
A silver lining may emerge from the potential inclusion of Fully Accessible Route (FAR) securities in the Bloomberg Emerging Markets Index, which could attract global investors and partially alleviate balance of payments (BoP) pressures.
For now, India's BoP is expected to post a deficit in the range of USD 5 billion to USD 20 billion in FY26 contingent largely on how global tariff dynamics evolve, the report added.
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