New Delhi: India’s booming services sector is set to cushion the blow from US tariffs on exports, with the country’s services trade surplus projected to touch an all-time high of $205–207 billion in FY26, according to a report released on Wednesday by ICRA.
The report highlights that India’s current account deficit (CAD) narrowed sharply to $2.4 billion (0.2% of GDP) in Q1 FY26, far below the $8.6 billion deficit (0.9% of GDP) recorded in the same quarter last year and well below ICRA’s earlier forecast of 0.7% of GDP. The improvement was primarily driven by stronger remittances and a robust services surplus.
Earnings from invisibles rose nearly 20% year-on-year to $66.1 billion in Q1 FY26, almost fully offsetting the merchandise trade deficit of $68.5 billion.
However, ICRA cautioned that this relief may be short-lived. The CAD is projected to widen to $13–15 billion (1.5% of GDP) in Q2 FY26, driven by a sharp expansion in the merchandise trade gap.
The report flagged the impact of Washington’s recently imposed 50% tariffs on Indian goods, which are expected to hit textiles, diamonds, seafood, and leather exports particularly hard. Should these duties persist through FY26, India’s CAD could climb above 1% of GDP, compared with 0.6% in FY25, ICRA projected.
India recorded net financial inflows of $8.1 billion in Q1 FY26, reversing the outflows seen in the second half of FY25. Yet, reserve asset accretion slowed to $4.5 billion, down from $8.8 billion in Q4 FY25.
Forex reserves stood at $691 billion as of August 22, while the rupee depreciated 3.2% against the US dollar in 2025 (till September 1). ICRA expects the USD/INR to trade in the 87–89 range in the near term.
The trajectory of India’s external sector, ICRA underlined, will largely depend on how long the US tariffs remain in place. “The resilience of services trade and remittances will provide a buffer, but persistent tariff-related pressures could weigh on the CAD,” the report stated.
