Mumbai: India’s current account deficit (CAD) is expected to widen sharply in the current financial year as prolonged disruptions in the Strait of Hormuz drive up crude prices, with economists warning that austerity measures, as appealed by Prime Minister Narendra Modi, may offer only limited relief.
PM Modi on Sunday urged Indians to adopt covid-era austerity measures such as working from home, reducing fuel consumption, avoiding foreign vacations and deferring gold purchases for a year.
Three economists believe that the Prime Minister’s call for “economic patriotism” could provide temporary relief to the external account by curbing discretionary imports, such as gold and , but warned that the broader current account position would still deteriorate materially in FY27 due to elevated crude prices and weak capital flows.
A country’s CAD is the gap between the money it earns from the rest of the world and the money it spends abroad. India usually runs a CAD because it imports far more crude oil and gold than it exports. A high CAD means India needs more dollars to pay for imports, and more demand for dollars usually weakens the rupee.
Dhiraj Nim, foreign exchange strategist at ANZ, estimates India’s CAD at 1.8-2% of GDP in FY27, assuming oil averages around $95 per barrel, while the balance of payments (BoP) deficit could remain between $35 billion and $50 billion, depending on portfolio flows.
“We do believe that the Indian crude basket will average at $90 per barrel for FY27,” said Gaura Sengupta, chief economist at IDFC First Bank. “For now, CAD is tracking at around 2.4% of GDP… still almost $100 billion of current account deficit, but much higher than what we faced in FY26,” Sengupta said. In FY26, India’s CAD had narrowed to about 0.9% of GDP.
Sengupta said the oil deficit may initially appear less severe because countries are struggling to access crude supplies and import volumes could decline in the first half of the financial year, but she expects imports to rebound in the second half as supply chains normalise and countries rebuild inventories.
India imports 85-90% of its crude oil requirements, making it the world’s third-largest oil importer. India’s crude oil import bill for FY26 was $134.7 billion, according to official trade data reported as of 10 May as against $137 billion in FY25.
“What they could not import in H1, it will pick up in H2,” Sengupta said, adding that even after a ceasefire, Gulf Cooperation Council (GCC) production could take three to six months to fully recover.
She also warned that India’s import cover could weaken meaningfully over the year. “As of March 2026, the import cover is of nine months, which is FX reserves and the forward book. If crude prices average at $90 per barrel, then import cover could reduce to 7.5 months by March 2027,” she said, adding that the ratio could slip below seven months under a more adverse scenario.
“Assuming the price remains higher at $10/bbl for the entire year, which looks unlikely, the oil bill can go up theoretically by around $18 billion on annualized basis—an extreme case,” Mint reported earlier, quoting Madan Sabnavis, chief economist at Bank of Baroda.
Gold curbs
Economists also said that while restrictions or voluntary moderation in gold purchases may reduce CAD pressure marginally, structural demand is unlikely to disappear.
“PM Modi’s call for economic patriotism, by urging the public to defer gold purchases for a year, if responded positively, could help moderate gold imports and ease pressure on dollar demand, offering some support to India’s CAD position,” said V.R.C. Reddy, treasury head at Karur Vysya Bank said.
In FY26, India’s gold imports accounted for 9.3% of the total import bill.
However, the continues to pose a significant macro risk through elevated crude prices and external sector pressures, Reddy said, adding that with sustained foreign institutional investor (FII) outflows, crossing $50 billion since the beginning of 2025, CAD concerns remain relevant in the near term.
He pinned hopes of improvement in the second half of FY27 through stronger external commercial borrowing (ECB) mobilisation, improving foreign direct investment (FDI) flows and a possible return of foreign portfolio flows to emerging markets.
Rupee risks
, economists remained cautious despite expectations of some policy measures to attract foreign capital, including potential dollar bond issuances by public sector banks.
Sengupta said the rupee could hit the 96 per dollar mark in the near term if the Hormuz disruption lasts longer than expected and risk aversion drives capital outflows.
Nim of ANZ projected the currency at 97.5 at year-end, saying the outlook reflects how fundamental the current account stress is for the rupee.
According to Nim, India’s policy response has delayed the natural economic adjustment to higher oil prices.
“By not letting consumers face the higher prices, we have not let inevitable adjustments happen,” he said, adding that fuel price hikes may eventually curb discretionary spending and import demand with a lag.
Neither Sengupta nor Nim believes that India is close to becoming a fragile five-nation once again.
Fragile Five refers to a group of emerging economies identified during the 2013 taper tantrum as being highly vulnerable to external shocks because of large CAD, high inflation and dependence on foreign capital flows. India gradually moved out of the category during 2014-2018.
“…we are not in the same situation as fragile five as the crisis has occurred when we have low CAD, improving fiscal metrics and strong domestic growth,” Sengupta said.