Services Cushion India’s BoP as Trade Gap, FPI Outflows Bite

India’s external account looked steady on the surface in 2025-26, but the composition of the balance of payments showed rising dependence on services exports and remittances to offset a widening goods trade deficit and persistent foreign portfolio outflows.

The current account deficit stood at $25.2 billion, or 0.6% of GDP, in 2025-26, barely changed from $22.9 billion, also 0.6% of GDP, a year earlier, Reserve Bank of India data showed.

That stability, however, masked a sharp deterioration in the goods trade balance.

The merchandise trade deficit widened to $337.3 billion in 2025-26 from $286.9 billion in 2024-25.

The offset came from invisibles, with net invisibles receipts rising to $312 billion from $264 billion, led by stronger services receipts and personal transfers.

The data suggest India’s external balance remained manageable not because the goods account improved, but because services and remittances continued to absorb the pressure from a larger merchandise deficit.

Services Support
The January-March quarter captured this divergence clearly.

India posted a current account surplus of $7.1 billion, or 0.7% of GDP, in January-March 2025-26. That was lower than the $13.7 billion surplus, or 1.4% of GDP, recorded a year earlier.

The narrowing came despite strong services and remittance flows, as the merchandise trade deficit widened to $83.4 billion from $59.3 billion a year earlier.

Net services receipts increased to $60.4 billion in January-March from $53.3 billion a year earlier. Services exports rose year on year in major categories such as computer services and other business services.

For the full year, net services receipts rose to $216.6 billion from $188.8 billion in 2024-25.

Personal transfer receipts, mainly remittances by Indians employed overseas, also remained a key cushion. They rose to $43.5 billion in January-March from $33.9 billion a year earlier.

Secondary income net receipts increased to $41.3 billion in the quarter from $31.5 billion a year earlier. For the full year, secondary income receipts rose to $143.6 billion from $123.5 billion.

The strength in services and remittances helped prevent the wider goods deficit from turning into a larger current account shock.

Yet the full-year numbers show the vulnerability as goods exports rose only modestly to $446.1 billion in 2025-26 from $442.1 billion, while goods imports increased to $783.4 billion from $729.0 billion.

The petroleum, oil and lubricants deficit narrowed marginally to $120.1 billion from $122.4 billion, suggesting the broader goods deficit was not only an oil story.

Financing Strain
The financing side of the balance of payments showed a different pressure point.

Net foreign direct investment inflows improved to $6.9 billion in 2025-26 from $1.0 billion a year earlier. In January-March, foreign direct investment recorded a net inflow of $4.2 billion, up from $0.4 billion a year earlier.

Foreign portfolio investment moved in the opposite direction. FPIs recorded net outflows of $16.4 billion in 2025-26, compared with net inflows of $3.6 billion in 2024-25.

In January-March alone, portfolio investment recorded a net outflow of $12.0 billion, higher than the $5.9 billion outflow in the same quarter a year earlier.

That swing shows that the current account remained contained, but the financial account showed continuing reliance on less stable flows and reserve adjustment.

Foreign exchange reserves depleted by $23.6 billion on a balance-of-payments basis in 2025-26, compared with a depletion of $5.0 billion a year earlier.

In January-March, reserves increased by $7.2 billion on a balance-of-payments basis, compared with an accretion of $8.8 billion a year earlier. The quarter therefore provided some relief, but the full-year reserve movement still pointed to pressure.

Non-resident Indian deposits recorded a net inflow of $3.3 billion in January-March, higher than $2.8 billion a year earlier. For the full year, however, NRI deposit inflows fell to $14.4 billion from $16.2 billion.

External commercial borrowing inflows also moderated, standing at $3.6 billion in January-March, compared with $7.5 billion a year earlier. For 2025-26, ECB inflows fell to $14.2 billion from $18.5 billion.

The data therefore show that while direct investment improved, portfolio flows weakened sharply and debt-related flows were softer.

Policy Read
The BoP numbers help explain the policy focus on attracting capital inflows announced alongside the June monetary policy review.

A current account deficit of 0.6% of GDP is not large by historical standards, and January-March even produced a surplus. Yet the pressure points are clear: a much wider goods trade deficit, heavy reliance on services and remittances, large portfolio outflows and a sharper full-year depletion of reserves.

The RBI data also revised the October-December current account deficit to $15.5 billion, or 1.5% of GDP, from $13.2 billion, or 1.3% of GDP, due to an upward revision in merchandise imports in customs data.

That revision reinforces the message that the goods import bill remains the main external vulnerability.

The overall story is therefore not one of external distress. The current account remained contained, services exports continued to scale up, remittances were strong, and FDI improved.

The more useful reading is that India’s external account has become increasingly dependent on the strength of invisibles to offset goods-trade pressure, while portfolio outflows and reserve depletion have kept the financing side under strain.

For policymakers, the task is to preserve the services and remittance cushion while attracting more durable capital inflows. For markets, the key signal is that the headline current account number looks comfortable, but the underlying mix has become less benign.