MUMBAI: Falling imports likely to have helped the current account balance (CAB) to turn in a surplus of around $7 billion (0.7% of GDP) in 4QFY25, marginally higher than $4.6 billion (0.5% of GDP) registered in 4QFY24—a first in three quarters. The third quarter of the past fiscal had seen a deficit of $11.5 billion or 1.1% of GDP, according to a reading by a credit rating agency.
But the agency India Ratings, expects the current account balance to fall to deficit mode again in the first quarter of the current fiscal at 1.2% of GDP given the likely higher pre-emptive imports before the punitive tariffs from the US kick in. Also, the spike in oil prices will play out negatively on the numbers.
While merchandise exports were down 4.4% yoy in 4Q, due to the combination of a high base effect and weak demand from key exporting partners such as the European Union, China, Bangladesh and Singapore, merchandise imports grew 1.2% in 4Q, nearly half of 2.7% on-year, and the lowest in the past five quarters. Sequentially, goods imports declined to a three-quarter low of $173.9 billion in 4Q. Import fall was led by primary goods which dropped 9.4%, while intermediate and infrastructure goods grew 11.1% to a 10-quarter high and 8.8%, respectively, and consumer durables and non-durables rose up 6.7% and 10%, respectively.
Due to the tariff wars, the agency expects merchandise exports to fall to around $113 billion in 1QFY26, while merchandise imports, are expected to increase to around $189 billion, due to pre-emptive buying in view of the tariff pause and geopolitical tensions. But overall the goods trade deficit to rise 22.4% to around $76 billion in 1QFY26, leading to 1.2% CAD, cushioned by a $48 billion surplus in services trade.
Overall we see the CAB to turn into a deficit of around 1.2% of GDP in 1QFY26” again, says the agency, adding the ongoing military conflicts between Israel and Iran only adding to the ark clouds.
Iran’s threat of close the Strait of Hormuz that ships over 20% of the world’s oil supply can spring up oil prices significantly. If such a situation were to materialise, then this could take the current account deficit to beyond 1.5% of GDP in the later part of FY26.