India’s external sector witnessed a significant turnaround in the fourth quarter of the financial year 2024-25 (Q4FY25), as the country posted a current account surplus of $13.5 billion, equivalent to 1.3 per cent of its Gross Domestic Product (GDP).
This marks the first surplus in three quarters, signalling a positive shift in India’s external balance and providing fresh optimism amid global economic uncertainties.
What is the current account balance?
The current account balance is a crucial indicator of a country’s economic health, reflecting the difference between the value of exports and imports of goods and services, alongside net income from abroad and current transfers.
A surplus means the country is earning more from its exports and foreign income than it is spending on imports and foreign payments, which generally strengthens the national currency and foreign reserves.
What’s driving this trade surplus
The Reserve Bank of India (RBI) data reveals that the surplus was largely driven by a robust surge in services exports, which rose to $53.3 billion in Q4FY25 from $42.7 billion in the same quarter last year. India’s IT and business services sectors, known for their global competitiveness, played a pivotal role in this growth.
Additionally, a notable decline in primary income outflows — payments made on investments abroad — helped narrow the deficit. These outflows fell to $11.9 billion from $14.8 billion in Q4FY24. Remittances from Indians working overseas also increased, reaching $33.9 billion, further bolstering the current account.
Trade deficit and reserves: The other side of the coin
Despite the surplus, India’s merchandise trade deficit widened to $59.5 billion in Q4FY25 from $52 billion a year earlier, though it improved from the previous quarter’s $79.3 billion. This indicates that while goods imports remain high, the strong services sector and remittances are compensating for the gap.
However, foreign exchange reserves saw a modest accretion of $8.8 billion in Q4FY25, significantly lower than the $30.8 billion added in Q4FY24. For the entire FY25, reserves depleted by $5 billion, a reversal from the $63.7 billion accretion in FY24, reflecting global market volatility and capital flows.
What lies ahead?
Economists, including Icra’s Chief Economist Aditi Nayar, expect the current account to revert to a deficit of around 1.3 per cent of GDP in Q1FY26 due to anticipated widening of the merchandise trade deficit and a moderation in services exports. Nevertheless, the projected average CAD of about 1 per cent of GDP for FY26 remains manageable, especially with crude oil prices stabilising around $70 per barrel.
Why this matters
A current account surplus is a sign of economic resilience, especially for a developing economy like India’s. It reduces dependence on foreign capital inflows, supports the rupee, and enhances investor confidence. The Q4FY25 surplus underscores the growing importance of India’s services sector and remittances in balancing the external accounts, even as the country navigates global economic headwinds.
In a nutshell
India’s return to a current account surplus in Q4FY25 is a welcome development, reflecting strong services exports and prudent management of income outflows. While challenges remain, particularly on the trade front, the overall external sector outlook is positive, setting a stable foundation for economic growth in the coming
