India’s CAD to remain elevated in FY26

New Delhi: India’s current account deficit (CAD) is expected to remain elevated in FY26 due to stringent global trade policies, according to a report by JM Financial.

The report highlighted that the country’s imports have consistently outpaced exports, leading to a widening trade deficit. The risk of a further deterioration in India’s trade balance due to sluggish exports, which will keep the country’s current account deficit (CAD) elevated.

It said, “the global supply chain gets re-aligned with Trump’s trade policies, India’s exports will be impacted the most vs. imports; hence we expect exports to trail imports in 2025 as well”.
In November 2024, the trade deficit expanded to USD 37 billion, significantly higher than the monthly average of USD 23.5 billion recorded during April-October 2024.

The report attributed this trend to the realignment of global supply chains influenced by US President-elect Donald Trump’s trade policies. It also predicted that India’s exports will be more adversely impacted than imports, with exports likely to trail imports in 2025 and beyond.
“We are now building in a CAD of approximately 1.5-1.6 per cent of GDP for FY25, and depending on Trump’s policies, it should continue to remain elevated in FY26 at around 1.4-1.5 per cent,” the report stated.

This persistent deficit is expected to exert pressure on the Indian rupee (INR), potentially leading to currency depreciation.

On a positive note, the report indicates that fiscal consolidation efforts will keep bond yields in check. The government is expected to meet its FY26 fiscal deficit target of 4.5 per cent comfortably.

However, this focus on fiscal discipline has led to reduced capital expenditure (capex) in FY25, particularly during the election period, when capex intensity slowed. Going forward, the report noted the government is likely to shift its focus to reducing debt levels, measured as a percentage of GDP, instead of solely prioritizing the fiscal deficit target.

This tight fiscal positioning, combined with the expected rate-easing cycle, is projected to stabilize bond yields.

The report anticipated bond yields to average 6.5 per cent (within a range of 6.2-6.8 per cent) during 2025.