CAD widens to 1.3% in Q3, reserves shrink by $24.4-bn, Pg15

Key Highlights:

• India's Current Account Deficit (CAD) rose to 1.3% of GDP, totaling $13.2 billion in Q3 2025-26, up from 1.1% ($11.3 billion) in the same period last year.
• The increase in CAD is primarily attributed to a higher merchandise trade deficit, which reached $93.6 billion in Q3 FY26, compared to $79.3 billion in Q3 FY25.
• Foreign exchange reserves decreased by $24.4 billion during Q3 2025-26 on a balance of payments basis, reflecting persistent weakness in the capital account.
• In the period from April to December 2025, the reserves depleted by $30.8 billion, compared to a depletion of $13.8 billion in the previous year.

Detailed Insights:

• The widening merchandise trade deficit in Q3 FY26 was driven by increased imports and stagnating exports, influenced by factors such as high US tariffs and increased gold/silver imports.
• Despite relatively benign CAD figures, the capital account's weakness led to a significant depletion of foreign exchange reserves, impacting the overall balance of payments.
• The overall capital and financial account showed net inflows of $14.4 billion, which is considered low compared to typical patterns, indicating potential concerns about investment flows.
• A continued high trade deficit is anticipated for the current quarter, potentially leading to a further widening of the CAD, posing challenges for economic stability.

Key Concepts Involved:

• Current Account Deficit (CAD): Measures the difference between a nation's savings and investments.
• Merchandise Trade Deficit: Occurs when a country's imports of goods exceed its exports.
• Foreign Exchange Reserves: Assets held by a central bank in foreign currencies, used to back liabilities.