India's Current Account Deficit Set to Rise Amid Global Trade Challenges

India's current account deficit is projected to stay high due to global trade policies and sluggish exports, despite fiscal measures to stabilize the economy. The widening trade gap, pressured by realigned global supply chains and Trump's trade policies, poses challenges for the Indian economy’s growth trajectory.

India is bracing for a sustained elevated current account deficit in fiscal year 2026, as indicated by a JM Financial report, which pins the cause on stringent global trade policies. The consistent outpacing of imports over exports is leading to a notable trade deficit widening, posing concerns for economic stability.

The report underscores that as global supply chains undergo realignment under the influence of Trump's trade policies, India's exports are poised to suffer more than imports. This trend was evident in November 2024 when the trade deficit surged to USD 37 billion, significantly surpassing the monthly average from earlier in the fiscal year.

Looking ahead, the report foresees India's current account deficit to remain at 1.4-1.5% of GDP in FY26. This persistent deficit could pressure the Indian rupee and lead to currency depreciation. Nonetheless, fiscal consolidation may help maintain bond yield stability, aiding the government in meeting its fiscal targets.

The emphasis on fiscal discipline has, however, curbed capital expenditure, especially during election-driven fiscal restraint periods. Future strategies may pivot towards debt reduction as a share of GDP rather than solely focusing on fiscal deficit metrics.

A combined approach of careful fiscal management and a rate-easing cycle is anticipated to stabilize bond yields, which are projected to average 6.5% in 2025. Despite looming challenges from the current account deficit and global trade balances, India's fiscal prudence and stable bond environment are set to offer some economic relief.

(With inputs from agencies.)