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India's Trade Deficit Crisis: Why CAD Could Hit 1.7% Despite Lower Oil Prices

India's current account deficit is projected to worsen significantly this fiscal year. Global tariff pressures are keeping the trade deficit elevated despite weaker demand conditions. The situation is complicated by record merchandise trade deficits and surging gold imports during the festive season. However, lower oil prices and a potential US trade deal could provide some relief to the external balance.

Key Points: India Current Account Deficit to Rise 1.7% GDP in FY26 Union Bank

  • Persistent global tariff pressures driving trade deficit higher despite weak demand
  • Lower commodity prices, especially oil, may help limit overall deficit impact
  • Merchandise trade deficit hit record $41.68 billion in October 2025
  • Gold imports surged to record levels due to festive and wedding season demand
  • India-US trade deal expected to cut tariffs from 50% to 15-16%
  • Every $10 oil price move affects annual current account by $15 billion
3 min read

India's current account deficit expected to rise to 1.7% of GDP in FY26 due to persistent tariff pressures: Union Bank Report

Union Bank report warns India's current account deficit may hit 1.7% of GDP due to persistent tariff pressures and record trade deficit, despite lower oil prices providing some relief.

"We expect a rise in current account deficit to 1.7 per cent of GDP in FY26, as global trade tariff pressures continue to keep trade deficit elevated - Union Bank of India Report"

New Delhi, November 19

India's current account deficit (CAD) is expected to rise to 1.7 per cent of GDP in the current financial year FY26, higher than the bank's earlier projection of 1.2 per cent, according to a report by Union Bank of India.

The rise is mainly attributed to persistent global trade tariff pressures that continue to keep the trade deficit elevated despite weak demand and lower commodity prices.

It stated, "We expect a rise in current account deficit to 1.7 per cent of GDP in FY26, as global trade tariff pressures continue to keep trade deficit elevated".

A current account deficit (CAD) occurs when a country's total value of imports of goods, services, and capital is greater than the total value of its exports and other income. It indicates that more money is flowing out of the country than is flowing in.

The report highlighted that the trade deficit is likely to witness seasonal pressures due to festive demand effects. Lower commodity prices, especially oil, may, however, help limit the overall impact.

The bank noted that subdued oil prices could support India's external balance as the country's current account is highly sensitive to fluctuations in crude prices.

Every USD 10 per barrel move in oil prices affects the annual current account balance by close to USD 15 billion. The report added that this sensitivity means lower oil prices are likely to have a "salutary effect" on India's trade dynamics.

However, risks to the current account outlook have emerged from commodity price volatility, particularly crude oil, and the possibility of prolonged export weakness if the US-India trade deal impasse continues.

The report pointed out that the India-US Bilateral Trade Agreement (BTA) is nearing finalization, potentially by late November. The agreement is expected to cut tariffs from 50 per cent to 15-16 per cent.

While the near-term impact may be limited, the deal is expected to strengthen India's export base over time and partially offset trade balance pressures in the coming quarters.

As per data, India's merchandise trade deficit widened to a record high of USD 41.68 billion in October 2025, compared to USD 32.15 billion in the previous month.

The reading surpassed market expectations, marking a significant turning point in the country's trade balance.

The gold deficit also surged to record levels in October as festive and wedding-season demand, combined with pent-up buying after subdued imports earlier in the year, pushed gold inflows sharply higher.

While gold imports in November are expected to moderate in volume, they are likely to remain elevated in value due to strong investment demand despite high prices.

The report stated that gold demand is set to stabilise after the festive season but will likely stay elevated compared to earlier months.

- ANI

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Reader Comments

R
Rohit P
The silver lining is lower oil prices. As a country heavily dependent on energy imports, this could really help cushion the impact. Let's hope crude stays stable!
A
Arjun K
While I understand the economic concerns, I wish the report had more concrete suggestions for boosting manufacturing exports. We need to move beyond just hoping for trade deals and lower oil prices. The Make in India initiative needs stronger implementation.
S
Sarah B
The gold import numbers are staggering! ₹41.68 billion deficit is huge. As someone in the jewelry business, I see both sides - demand is real but we need to balance it better with exports.
V
Vikram M
Good to see banks being transparent about these projections. 1.7% of GDP is manageable if we play our cards right. The US trade deal could be a game-changer for our IT and pharma exports. 🤞
M
Michael C
As an investor, I'm watching the rupee movement closely. Higher CAD usually puts pressure on the currency. Hope RBI has adequate reserves to manage any volatility.

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