Trade Gap Widens, External Risks Rise for India’s Economy

India’s external sector is facing mounting pressure amid a volatile global environment, according to the Finance Ministry’s Monthly Economic Review for March 2026. The report highlights a deterioration in trade dynamics, widening imbalances, and growing stress from capital flows and commodity prices.

Merchandise trade performance has weakened slightly, with exports declining by 0.8% year-on-year, reflecting subdued global demand and persistent uncertainties. In contrast, imports have surged sharply, rising 24.1% over the same period. This imbalance has significantly expanded the trade deficit, driven largely by a spike in precious metal imports. Gold and silver shipments recorded particularly strong growth, contributing heavily to the rising import bill.

As a result, India’s merchandise trade deficit widened dramatically to USD 27.1 billion in February 2026, compared to USD 14.4 billion a year earlier. This sharp increase signals deepening external imbalances at a time when export momentum remains fragile.
The strain is also visible in the broader balance of payments. The current account deficit (CAD) rose to 1.3% of GDP in Q3 FY26, up from 1.1% in the same period last year. While services exports continue to provide some cushion, the expanding merchandise deficit has outweighed these gains, increasing reliance on external financing.

On the capital account front, global uncertainty has dampened investor confidence. Heightened geopolitical tensions have led to risk aversion, resulting in negative portfolio flows in March 2026. These outflows have added to financial market volatility and intensified pressure on the external sector.

Further compounding the situation, rising crude oil prices - driven by tensions in West Asia are increasing India’s import burden. Given the country’s dependence on energy imports, elevated oil prices are expected to widen the trade gap further.
These combined factors have also impacted the currency, with the Indian rupee experiencing depreciation pressures due to sustained capital outflows and a widening trade deficit.