Oil Shock Threatens Wider External Gap; FY27 CAD at 2% if Crude Averages $80: IDFC FIRST Bank

India’s current account deficit could widen sharply in 2026-27 if crude oil prices remain elevated, with IDFC FIRST Bank estimating that an average crude price of $80 per barrel would push the deficit to 2.0% of GDP. That compares with its base-case forecast of 1.6% of GDP, assuming the Indian crude basket averages $70 per barrel and geopolitical tensions ease quickly.

The warning comes against the backdrop of escalating conflict in West Asia, including disruptions around the Strait of Hormuz, through which nearly a third of global crude supplies are transported. For India, the exposure is acute: roughly 50% of its crude imports and 85% of its LPG supplies transit through the narrow passage.

Any prolonged closure or supply curtailment would keep energy prices elevated and inflate the import bill.

For 2025-26, however, the external position remains relatively contained. IDFC FIRST Bank has retained its CAD estimate at 1.0% of GDP, supported by a strong services surplus and steady remittances.

While the merchandise trade deficit is projected to widen to 8.9% of GDP in 2025-26 from 7.6% in 2024-25, much of the deterioration stems from higher net gold imports in the gems and jewellery segment. Net crude oil imports have remained broadly stable at 3.2% of GDP, aided by lower average oil prices during the year.

Services continue to provide a vital cushion. The services surplus is estimated at 5.5% of GDP in 2025-26, up from 5.0% in 2024-25, while remittances are seen rising to 3.5% of GDP. Software exports and professional services have remained resilient, offsetting the drag from bilateral tariffs and softer merchandise export growth.

Yet pressures are building on the capital account. The balance of payments is tracking a deficit of $19 billion so far in 2025-26, reflecting weaker capital flows and a wider trade gap. Net foreign portfolio investment flows have turned negative at $3 billion year-to-date, even as broader emerging markets have attracted sizeable inflows.. In October-December alone, the overall BoP deficit widened to $24.4 billion, led by a swing in the capital account into deficit.

The Reserve Bank of India’s forward book dynamics have also influenced the capital account. As buy-sell swaps matured, net dollar selling added to the BoP deficit, though the central bank has since conducted long-tenor swaps to extend maturities and manage liquidity.

Looking ahead, IDFC FIRST Bank expects 2026-27 BoP dynamics to improve on the back of stronger nominal GDP growth and a potential recovery in FPI and FDI flows. However, that outlook is contingent on geopolitical tensions remaining short-lived.

With crude hovering near $85 per barrel amid the Iran conflict, risks are clearly tilted to the upside for the oil import bill. A sustained risk-off environment could trigger further FPI outflows and keep the rupee under pressure, with dollar/rupee already breaching the 92-mark.

In such a scenario, the external deficit could widen meaningfully, testing the resilience built through services exports and remittance buffers.