India’s Current Account Deficit Outlook Improves Slightly for FY27
Although aggressive steps to reduce gold imports gave policymakers some respite, India’s current account deficit is expected to slightly decrease in FY27. However, Yes Bank analysts cautioned on Thursday that persistent pressure on capital flows will continue to negatively impact the rupee well into the second half of 2026.
Trade Deficit Expands as Oil and Gold Imports Surge
Due to a spike in oil and gold imports, India’s trade deficit increased to USD 28.4 billion in April from USD 20.7 billion in March, despite merchandise exports showing their highest year-over-year growth in recent months.
The April statistics, according to Yes Bank’s Economics Research team, demonstrated the structural tension at the core of India’s external accounts, with strong domestic demand drawing in imports at a rate that export growth has so far found difficult to match.
After declining by 7.4% in March, headline exports increased by 13.8% year over year to USD 43.6 billion in April. Exports of petroleum products led the way, rising 85.1% month over month, mostly due to rising worldwide prices. Iron ore, jewelry and gems, and electronics all saw successive increases.
Non-oil exports, on the other hand, increased by a more modest 0.7% month over month to USD 34 billion, suggesting that export momentum outside of the energy complex is still shaky.
Oil and Gold Imports Push Import Bill Higher
With non-oil and non-gold imports continuing to be strong at USD 47.7 billion, the total import bill was USD 71.9 billion, up 10% year over year. Due in part to increased traffic over the Strait of Hormuz when a truce was declared, the oil import bill skyrocketed to USD 18.6 billion from USD 12.2 billion in March.
At USD 5.6 billion, gold imports increased 83.8% month over month and made up 7.8% of all imports. In FY26, this percentage averaged 8.9%, which was higher than 7.8% in FY25 and 6.6% in FY24.
The administration has taken the most decisive action on the gold front. With effect from May 13, the Agricultural and Infrastructure Development Cess was increased from 1% to 5%, while the import duty on gold and silver was increased from 5% to 10%, raising the overall effective import charge to 15%.
Under the advance authorization program, manufacturers are also subject to import quantity restrictions of 100 kg, and subsequent licenses are contingent upon the fulfillment of at least 50% of prior export requirements. The gold desk at Yes Bank currently projects that import volumes would drop significantly from an expected 720 tons in FY26 to about 420 tons in FY27.
Assuming Brent crude is at USD 85 per barrel, the bank has lowered its estimate of the current account deficit for FY ’27 from 1.8% of GDP to 1.5%. The savings from gold imports alone are predicted to be roughly USD 23 billion, while the projected value of gold imports has dropped from an earlier projection of USD 80 billion to USD 57 billion.
However, it is not anticipated that the increase in gasoline and diesel prices will result in a significant decrease in the volume of crude imports.
Rupee and Capital Flow Risks Remain Key Concerns
Yes Bank said that the capital account will continue to be a cause for concern despite the better current account outlook. The bank projects that by the middle of the year, the USD/INR exchange rate will be between 97.00 and 97.50, and the balance-of-payments deficit will be USD 30 billion in the base case.
The net services surplus decreased marginally to USD 20.6 billion in April from USD 20.9 billion in March, while services exports increased 13.4% year over year but decreased 2.5% month over month to USD 37.24 billion.
Gold Curbs Alone May Not Solve External Account Pressure
According to Yes Bank, the balance-of-payments shortfall cannot be closed by gold import limitations alone. Attracting sufficient capital flows to finance the deficit at a time when global risk appetite is still uneven and the rupee is still under pressure to depreciate is the larger difficulty.
