Context:
India’s Current Account Deficit (CAD) widened to 1.3% of GDP ($13.2 billion) in Q3 of FY2025–26, primarily due to a rising merchandise trade deficit and declining foreign exchange reserves.
Key Highlights:
Rise in Current Account Deficit
- CAD increased to 1.3% of GDP in Q3 FY26, compared to 1.1% in Q3 FY25.
- Total CAD stood at $13.2 billion.
Merchandise Trade Deficit
- Trade deficit widened to $93.6 billion, up from $79.3 billion last year.
- Driven by:
- Higher imports
- Sluggish exports
- Increased imports of gold and silver
- High US tariffs affecting exports.
Decline in Forex Reserves
- Foreign exchange reserves fell by $24.4 billion in Q3 FY26 on a balance of payments basis.
- From April–December 2025, reserves declined by $30.8 billion, compared to $13.8 billion depletion last year.
Capital Account Trends
- Net inflows in the capital and financial account stood at $14.4 billion, considered relatively low.
Significance
- A widening CAD can increase external vulnerability and pressure the rupee.
- Persistent trade deficits may affect macroeconomic stability.
Relevant Prelims Points:
- Current Account Deficit (CAD)
- Occurs when a country’s imports of goods, services, and transfers exceed exports.
- A component of the Balance of Payments (BoP).
- Merchandise Trade Deficit
- Occurs when imports of physical goods exceed exports.
- Foreign Exchange Reserves
- Assets held by the Reserve Bank of India (RBI) in foreign currencies.
- Components include:
- Foreign currency assets
- Gold reserves
- Special Drawing Rights (SDRs)
- Reserve position in the IMF.
- Balance of Payments (BoP)
- A record of all economic transactions between residents of a country and the rest of the world.
Relevant Mains Points:
Factors Behind Rising CAD
- High import dependence on energy and precious metals.
- Weak global demand affecting exports.
- Trade policy shifts such as tariffs in major economies.
Implications for the Economy
- Pressure on currency stability.
- Possible impact on inflation and capital flows.
- Increased dependence on external financing.
Policy Responses
- Promoting export diversification and competitiveness.
- Encouraging domestic manufacturing under initiatives like Make in India.
- Managing import demand, especially for gold.
Way Forward
- Strengthening export-oriented sectors such as electronics and services.
- Increasing foreign investment inflows.
- Enhancing trade agreements and market access.
UPSC Relevance:
- Prelims: Current Account Deficit, Balance of Payments, forex reserves, trade deficit.
- Mains: External sector stability, trade policy, macroeconomic management.