‘Reciprocal tariffs’ announced by the Trump administration have triggered unprecedented chaos. Countries, fearing a trade freeze and economic downturn , are scrambling to stitch new alliances. India too will feel the effects for sure; yet, the country’s external account may emerge with lesser damage compared to many others owing to a curious mix of factors.
To begin with, India’s current account deficit (CAD) is on a relatively steady footing at the onset of the trade war. The CAD for the third quarter of FY25 at 1.1 per cent of GDP was better than the 1.8 per cent in the same quarter of FY24. While merchandise trade deficit widened due to higher petroleum products imports, healthy growth in services exports helped the current account balance. The capital account, however, has been under stress with copious foreign portfolio outflows, slowing foreign direct investments and NRI remittances weakening the balance of payments considerably. Reciprocal tariffs will impact merchandise exports to the US which have an 18 per cent share in overall exports. It is hoped that future negotiations between India and the US will help in this respect. Services exports will be hit if the US goes into a recession with Indian IT players deriving a large chunk of their business from North America.
Yet, there are three factors which can help our current account balance going forward. One, the weakness in the dollar index, which is down around 5 per cent since the beginning of 2025 is helping all emerging market currencies, including the rupee. The rupee has already appreciated around 2.5 per cent from its recent lows. The strength in the rupee will help reduce import values. The export competitiveness of the Indian currency may not be eroded, as most emerging market currencies have strengthened due to dollar weakness this year. It is another matter that a global growth slump could lower exports. Second, notwithstanding uncertain exports, subdued crude oil prices will aid the CAD. With the looming threat of recession in the US and growth slowdown in rest of the world expected to shrink oil demand substantially, crude oil prices are forecast to fall below $60 a barrel going forward. OPEC+ deciding to increase supplies has only stoked downward pressure. The third positive factor for the CAD is the reduction in gold jewellery demand due to the surge in gold prices. Safe-haven demand for the yellow metal will keep prices at an elevated level. Gold imports in February are already reported to be 85 per cent lower compared to last year, hitting a 20-year low.
There could be relief in the capital account too as foreign portfolio investors move money out of the US into Indian equity and bond markets. Research houses are expecting India’s current account balance to remain at current levels in FY26. The monetary policy committee can focus on domestic growth concerns without being too weighed down by the impact of lower interest rates on the rupee.