India’s current-account surplus conceals a widening non-oil trade gap

The Reserve Bank of India reported a preliminary current-account surplus of $7.1 billion for January–March 2026, equivalent to 0.7% of quarterly GDP. A year earlier the surplus was $13.7 billion, or 1.4% of GDP. The encouraging part of the release is the capacity of services receipts and transfers to offset a large goods deficit. The concern is that the goods gap widened even as the measured net petroleum deficit narrowed. India’s external position will be more resilient if it can sustain services income and address the composition of the non-oil gap. RBI, 8 June balance-of-payments release, Table 1

Where the $6.6 billion deterioration came from

RBI Table 1 puts the merchandise deficit at $83.4 billion, compared with $59.3 billion a year earlier. That is a widening of about $24.1 billion. Net services receipts improved by $7.1 billion to $60.4 billion. Net secondary income rose by $9.8 billion to $41.3 billion, and the net primary-income outflow narrowed by about $0.8 billion. Together those offsets were roughly $17.7 billion. Subtracting them from the worsening goods balance gives approximately $6.4 billion of deterioration, close to the reported $6.6 billion change in the current account once the rounded line items are taken into account. RBI, 8 June balance-of-payments release, Table 1

Net balance, US$ billion	Jan–Mar 2025	Jan–Mar 2026	Change
Goods	−59.3	−83.4	−24.1
Services	+53.3	+60.4	+7.1
Primary income	−11.9	−11.1	+0.8
Secondary income	+31.5	+41.3	+9.8
Current account	+13.7	+7.1	−6.6

Personal transfer receipts, mainly remittances, rose from $33.9 billion to $43.5 billion on the RBI’s figures. These are receipts. The current-account identity uses the broader net secondary-income balance. Mixing the gross receipt figure with other net components would overstate the amount available to offset the merchandise deficit. This accounting distinction matters when a large remittance figure is used to explain a quarterly surplus. RBI, 8 June balance-of-payments release, Table 1

Petroleum narrowed the gap in the quarter

The RBI’s petroleum, oil and lubricants category had a net deficit of $26.3 billion, down from $30.2 billion a year earlier. Subtract that category from the total goods balance and the remaining deficit is approximately $57.1 billion, compared with $29.1 billion a year earlier. That is an increase of about $28.0 billion. The $3.9 billion improvement in the petroleum balance partially offset the widening elsewhere. This decomposition uses the categories in the RBI release and does not identify which non-petroleum products caused the change. RBI, 8 June balance-of-payments release, Table 1

A larger non-petroleum deficit can reflect very different economic developments. Capital goods imports can support an expansion in domestic productive capacity. Higher intermediate imports can reflect growth in assembly or export production. A rise in final consumer imports or weaker non-oil exports has a different implication for future foreign-currency earnings. Without a product-level split, there is little basis for concluding that the wider gap reflects either a healthy investment cycle or a loss of competitiveness. Compare import volumes, unit values and end-use categories, then test whether the sectors buying more inputs subsequently raise output or exports.

The gross flows narrow the set of explanations. Using the RBI’s rounded petroleum and total-goods entries, non-petroleum imports increased from about $131.5 billion to $158.0 billion, while non-petroleum exports edged down from $102.3 billion to $100.8 billion. The import side drove most of the change. That still leaves price, volume and product mix to be explained. An analyst should start with the largest contributors to the increase in import value, then check whether unit values rose or buyers imported more at similar prices. A higher nominal import bill driven by a few expensive products calls for a different response from a broad shift toward foreign final goods. RBI, 8 June balance-of-payments release, Table 1

There is a policy risk in using the widening balance as a target by itself. A restriction that reduces the import of inputs used by exporters can improve the measured goods balance in the near term while making later exports less competitive. An intervention should be justified by evidence on the underlying problem, such as supply risk, persistent barriers to domestic production or a missing capability. For an investment-led import surge, a better test is whether capital goods are installed and used and whether the resulting production eventually generates income or exports.

The financing side has its own vulnerabilities

Net foreign direct investment rose to $4.2 billion in the quarter from $0.4 billion a year earlier. Net foreign portfolio outflows increased to $12.0 billion from $5.9 billion. The RBI also reported $7.2 billion of reserve accretion on a balance-of-payments basis during the quarter, while reserves declined by $23.6 billion on that basis over the full financial year. A positive current account for one quarter and outflows from traded assets can therefore coexist. The sustainability question depends on the type and maturity of financing, not just its headline total. RBI, 8 June balance-of-payments release, Table 1

Reserve movements also require a definition. A change measured on a balance-of-payments basis excludes valuation effects, while the nominal dollar value of the reserve stock can move as reserve currencies and gold are repriced. The RBI’s separate reserve-variation release makes that distinction explicit. A financing dashboard should show the two measures together and avoid inferring the scale of intervention directly from a change in gross reserves. It should also distinguish direct investment, portfolio flows and shorter-term funding, which can react differently to a change in global risk appetite. RBI, 8 June balance-of-payments release, Table 1 · RBI, 8 June sources of variation in foreign-exchange reserves

An oil stress test belongs in the next quarter’s outlook

A narrower petroleum deficit in the March quarter says little about the size of the June-quarter oil bill. At its 5 June meeting the MPC pointed to elevated energy prices and supply-chain disruptions and held the repo rate at 5.25%. The U.S. EIA’s 9 June outlook assumed that disruptions through the Strait of Hormuz would keep Brent near an average of $105 a barrel in June and July. That is a forecast conditional on supply and demand assumptions, with a different time window from the RBI’s observed trade data. RBI, 5 June Monetary Policy Committee resolution · RBI Governor’s statement, 5 June · U.S. EIA, 9 June Short-Term Energy Outlook release

For a transparent stress test, every sustained $10 increase in the price of one million net barrels a day over 90 days adds about $900 million to the bill, with volumes and other terms held constant. The calculation is a sensitivity, not a claim about India’s net import volume. Refined-product export prices, changes in volumes, contract terms, freight, and sourcing discounts can alter the result. Putting oil sensitivity alongside the non-oil gap shows why the next quarterly deficit could move even if the underlying competitiveness of Indian exporters is unchanged.

The services and transfer offsets should also be monitored separately. Services exports depend on overseas clients and the mix of activities India sells, while transfers depend on earnings and employment abroad. Changes in global demand can affect both without showing up immediately in merchandise orders. The quarterly release shows the strength of these offsets in aggregate. Testing their resilience requires more detail on the markets and sectors generating receipts, as well as attention to whether nominal receipts are rising because of prices, exchange rates or additional activity. RBI, 8 June balance-of-payments release, Table 1

A practical scorecard would track three series before the next balance-of-payments release: the non-petroleum trade gap by product, services receipts and financing flows split by instrument. Compare them against previous March and June quarters to avoid interpreting a seasonal change as a structural one. Then publish an oil-price scenario separately. If the goods gap widens in capital inputs and exports subsequently expand, that is consistent with an investment explanation. A wider gap in consumption goods, weak export volumes and reliance on short-duration financing would warrant a more cautious reading of the same headline balance.

The strongest case for optimism is the demonstrated resilience of services and transfers. For 2025–26 as a whole, the RBI puts net receipts from services, income and transfers together at $312.0 billion, up from $264.0 billion. The full-year current-account deficit was still $25.2 billion, or 0.6% of GDP. A sustained expansion in services can finance useful imports and support domestic income. The evidence that would strengthen that judgement is rising export volumes and productive investment alongside stable financing and lower vulnerability to commodity shocks. Until that evidence is clear, the right policy focus is the composition of the goods deficit and the durability of the offsets that finance it. RBI, 8 June balance-of-payments release, Table 1