Lower oil prices, strong services exports to keep India's CAD around 1% in FY26: Report

New Delhi, [India] December 17 (ANI): India's external sector outlook remains broadly stable despite recent volatility in trade data, with the current account deficit (CAD) expected to remain around 1 per cent of GDP in FY26, supported by easing commodity prices, resilient services exports and moderating trade pressures, according to a research report by Union Bank of India.
The report noted that oil prices are expected to remain modestly bearish in December 2025, weighed down by ample global supply, rising inventories and softening demand conditions. This trend is likely to provide meaningful support to India's trade and current account dynamics, given the economy's high sensitivity to crude prices.
"Going forward, we see trade deficit moderating after seasonal pressures fades; also, lower commodity prices (especially oil) will support. However, lower oil prices may support C/A dynamics given high sensitivity: every $10/b move in oil price affecting annual C/A balance by close to $15 bn." the report noted.
Lower oil prices are therefore expected to have a salutary effect on the trade balance going forward, particularly as seasonal pressures fade. While the oil trade deficit remains elevated, subdued crude prices are likely to cap further deterioration and aid external sector stability in the coming months.
On gold, the report highlighted that imports are expected to normalize in both volume and value in December, following a sharp correction after the October surge.
"Going forward, gold imports in December are expected to normalize in volume & value, despite investment demand & wedding related purchases despite high prices." said the report.
This normalization is anticipated despite continued investment demand and wedding-related purchases, even as gold prices hover near record highs. the report suggests that while festive and wedding demand remains supportive, overall buying activity has moderated, helping ease pressure on the trade deficit.
The report further projected that India's current account deficit in FY26 is likely to track close to 1 per cent of GDP amid a sharp recovery in trade dynamics.
"We expect the CAD to remain favourable at around 1% of GDP in FY26" the report noted
Although the CAD forecast had been revised higher to 1.7 per cent of GDP following the October 2025 trade data shock, stronger-than-expected improvement in November and sustained resilience in services exports have led to reassess the outlook more favourably.
Services exports continue to act as a critical buffer for India's external balance, offsetting a large part of the merchandise trade deficit and underpinning overall current account stability. As a result, the report expects the CAD to remain favourable at around 1 per cent of GDP in FY26.
With the India-US bilateral trade agreement (BTA) nearing potential finalisation by late December 2025, the report sees scope for a reduction in tariffs from 50 per cent to around 15-16 per cent, which could support India's exports. While the near-term impact of the agreement may be limited, it is expected to strengthen India's export base over time, partially offsetting pressures on the trade balance in the coming quarters.
Overall, the report suggests that India's external sector fundamentals remain favourable, supported by moderating commodity prices, normalization in gold imports, resilient services exports and improving trade dynamics. (ANI)