Current Account Deficit FY25: Why India’s External Position Looks More Stable Than Expected

India’s current account deficit for FY25 has turned out to be significantly lower than market expectations, aided by a strong services surplus, higher remittances, and resilient trade adjustments.

What Does Current Account Deficit (CAD) Tell Us?

The current account is a key component of a country's balance of payments. It reflects the net flow of goods, services, income, and transfer payments between residents of a country and the rest of the world.

For India, the current account typically shows a deficit, largely due to heavy crude oil imports, which constitute over 85% of our oil needs.

CAD is calculated using:

• Outflows: Merchandise trade deficit and primary income (interest/dividends paid abroad)
• Inflows: Services trade surplus and secondary income (remittances)

A lower CAD is a positive sign. It supports the rupee, improves investor sentiment, and helps maintain better sovereign credit ratings.

FY25 Current Account Performance vs FY24

Data Source: RBI

A Look at FY25: CAD Lower Than Feared

Despite posting a current account deficit (CAD) of $23.3 billion for the full fiscal year, India reported a surplus of $13.5 billion in Q4FY25. This brought the full-year CAD down to just 0.6% of GDP, far below most economists’ fears of 1.5% or higher.

A closer look shows that India’s services surplus covered about 66% of the merchandise trade deficit, thanks to continued strength in software exports, BPO services, accounting, audit, legal services, and the rise of global capability centres (GCCs) based in India.

Key Reasons Behind CAD Improvement in FY25

Here are four major factors that helped moderate the CAD:

1. Oil, Gold, and Imports Well-Managed

• Trade constraints led to deferred import demand.
• Gold imports were cut sharply, reducing import costs.
• Discounted Russian oil purchases helped contain energy-related outflows despite geopolitical tensions.

2. Strong Services Surplus

• Services exports remained resilient despite global tech slowdown.
• India’s BPO, software, and GCC segments kept inflows strong.
• Services trade was largely insulated from global trade restrictions.

3. Remittances Saw Sharp Growth

• Remittances rose 16.7% YoY, a key boost to secondary income.
• The weak rupee provided a good conversion rate for NRIs.
• Banks also offered attractive NRI deposit rates.

4. Lower Payouts on Investments

• With FPIs reducing exposure in FY25, there were fewer outflows via dividends and interest payouts.
• This was a reversal from FY24, where FPIs were significant equity and bond investors.

What Does This Mean for India?

A CAD of just 0.6% of GDP sends a strong signal of economic stability.

• It boosts investor confidence.
• Supports the rupee in the forex markets.
• Keeps India’s external vulnerability low, especially during global financial tightening cycles.

If this trend continues, it could also have positive implications on sovereign ratings and borrowing costs.

Final Word

India’s ability to manage its external account effectively in a turbulent global environment is commendable. The Q4FY25 surplus and a full-year CAD well below expectations signal that India’s external fundamentals are more stable than many had anticipated.

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Disclaimer: This article is for informational purposes only and should not be construed as financial advice. Please consult a qualified expert before making any financial decisions.