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India's External Sector at Risk as West Asia Crisis Threatens to Widen CAD

India's external sector outlook is manageable but faces heightened risks from the West Asia conflict, which is pushing up crude oil prices. The Balance of Payments deficit widened in Q3 FY26, though the Current Account Deficit narrowed slightly due to robust services exports and remittances. Yes Bank projects the CAD for FY27 could range from 1.1% to 1.5% of GDP, depending entirely on the trajectory of global oil prices. While capital flows are expected to recover next year, the overall external balance remains highly sensitive to geopolitical tensions and their impact on import costs.

Key Points: India's CAD May Widen to 1.5% of GDP on High Oil Prices

  • Q3 FY26 BoP deficit widened to $24.4B
  • CAD narrowed to 1.3% of GDP on strong services exports
  • Oil price spike to $82-84/barrel is key risk
  • FY27 CAD projected at 1.1-1.5% of GDP
  • Capital flows expected to recover to $33B in FY27
2 min read

India's BoP outlook faces risks from West Asia crisis; CAD seen at 1.1-1.5% of GDP in FY27

Yes Bank report warns India's BoP outlook faces risks from West Asia conflict, projecting CAD between 1.1-1.5% of GDP in FY27 depending on oil prices.

"The extent of hurt to India's external sector... is likely to hinge on the duration of the conflict - Yes Bank Report"

New Delhi, March 5

India's external sector outlook remains broadly manageable but faces rising risks from geopolitical developments in West Asia that could push up crude oil prices and widen the current account deficit, according to a recent research note by Yes Bank.

The report noted that India recorded a Balance of Payments (BoP) deficit of USD 24.4 billion in Q3 FY26, wider than the USD 10.9 billion deficit in the previous quarter, largely due to capital account outflows.

Despite the deterioration in BoP, the current account deficit narrowed marginally to USD 13.2 billion (1.3% of GDP) from USD 14.1 billion in Q2, supported by strong services exports and remittance inflows, which offset a widening merchandise trade gap driven by higher gold imports.

Looking ahead, the outlook for India's external sector will depend heavily on global oil price movements linked to the ongoing West Asia conflict. Brent crude has already risen to USD 82-84 per barrel from about USD 65 earlier, raising concerns over import costs and the trade deficit.

The report noted, "The extent of hurt to India's external sector and overall macro fundamentals is likely to hinge on the duration of the conflict and thus, the longevity of the firmness of the oil prices."

Under its baseline scenario, where oil prices average USD 65 per barrel, the report projects India's CAD at around 1.1% of GDP in FY27. However, if oil prices remain elevated at about USD 75 per barrel, the CAD could widen to 1.5% of GDP.

The report also expects capital flows to recover to about USD 33 billion in FY27, compared with an estimated USD 6 billion in FY26, assuming global financial conditions stabilise and India's growth outlook remains strong.

As a result, the overall BoP deficit is projected to narrow to about USD 16.3 billion in FY27, improving from an estimated USD 34 billion deficit in FY26.

The report, however, cautioned that the trajectory of India's external balances will remain sensitive to oil prices and the duration of geopolitical tensions, which could significantly influence import costs and capital flows.

- ANI

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Reader Comments

S
Sarah B
As someone working in the IT exports sector, I'm glad to see services exports and remittances are providing a buffer. It shows the strength of our human capital. However, the rising gold imports are a concern—can't we promote digital gold or other savings instruments?
A
Arjun K
The projection of capital flows recovering to $33 billion is optimistic but crucial. FIIs need stability. This West Asia situation is a major spoiler. Hope diplomacy prevails soon, for everyone's sake.
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Priya S
A CAD of 1.1% to 1.5% is manageable if growth is strong, but it pinches the common man through petrol prices. We felt it last time. The report is correct, the duration of high prices matters more than the spike itself.
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Vikram M
While the analysis is sound, I respectfully disagree with the baseline scenario of $65/barrel oil. That seems too low given current tensions. Planning should be for the $75 scenario to be safe. Better to be prepared for the worst.
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Kavya N
Remittances saving the day again! So many families, including mine, depend on money from abroad. It's a silent pillar of our economy. Hope the global slowdown doesn't affect our people working overseas.

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