Bank of America has revised its estimate of India’s current account shortfall, forecasting a larger deficit of $87.6 billion for fiscal year 2027, equal to 2.1% of GDP, before projecting an improvement to $45 billion, or 1% of GDP, in fiscal year 2028 as oil prices return to normal levels.
The bank’s update follows trade data for March that showed India’s merchandise trade deficit contracted to $20.7 billion from $27.1 billion in February and $21.5 billion a year earlier. The narrowing in the trade gap was driven by a 6.5% year-over-year decline in imports, led by a 35.9% fall in oil imports and a 31.6% drop in gold imports.
Bank of America attributed much of the reduction in imports to disruptions in shipping after the Strait of Hormuz was closed amid the West Asia conflict, which lowered shipments to India. At the same time, export performance softened: merchandise export growth decelerated to -7.4% year-over-year in March from -0.8% in February.
On an annual basis, cumulative exports for FY26, combining merchandise and services, are estimated at $860.09 billion, up from $825.26 billion in FY25, representing growth of 4.2%.
The West Asia conflict had a pronounced effect on bilateral trade with several Middle Eastern partners. Imports from the UAE plunged 66.3% year-over-year, while shipments from Saudi Arabia fell 37.3%, from Iraq dropped 64%, and from Qatar decreased 48%. Exports to those markets also weakened markedly, with shipments to the UAE down 62% and to Saudi Arabia down 46%.
Meanwhile, trade ties with other major partners showed mixed dynamics. Imports from China and the United States expanded strongly, rising 24.8% and 14.4% year-over-year respectively. Exports increased to China, Singapore and Hong Kong as India diversified its trade, while exports to the United States declined 21%.
Services trade provided a partial offset to goods weakness. The monthly services surplus expanded to $18 billion in March from $17.8 billion in February, with services exports up 0.8% month-over-month and services imports rising 0.6%. The overall monthly current account posted a surplus of $3.3 billion for March.
In its macro assumptions, Bank of America revised its base-case crude oil price projection to an average of $92.5 per barrel for 2026. The bank also expects India to record a balance of payments deficit for a third consecutive year, driven by capital outflows and continued current account pressures.
Separately, media reports indicate that India and the United States remain in trade discussions, with the next round of talks expected in the third week of April.
Key points
- Bank of America now forecasts a wider India current account deficit of $87.6 billion in FY27, narrowing to $45 billion in FY28 as oil prices normalize - impacts sovereign external balances and macro stability.
- March trade data showed the goods deficit narrowing to $20.7 billion, driven by a 6.5% fall in imports and steep declines in oil and gold shipments - relevant to the energy and commodities sectors.
- Services trade remained a source of resilience, with a surplus of $18 billion in March and a monthly current account surplus of $3.3 billion - pertinent for the services and IT sectors.
Risks and uncertainties
- Ongoing West Asia conflict and related shipping disruptions may continue to depress trade flows with Gulf partners, posing downside risk to goods trade and energy supply chains - affects energy, trade logistics, and import-reliant sectors.
- Capital outflows combined with current account pressures could sustain balance of payments deficits, adding vulnerability to external financing conditions - relevant for financial markets and sovereign funding costs.
- Volatility in oil prices remains a key uncertainty; while the bank assumes an average of $92.5 per barrel for 2026, deviations from this path would alter the deficit trajectory - impacts energy-dependent sectors and inflationary pressures.