India’s external position has shown a clear improvement in recent years. The country has a large foreign exchange reserve, a relatively modest current account deficit, strong services exports, high remittance receipts and a better net international investment position. These factors provide a useful buffer against external shocks.
At the same time, the picture needs careful reading. India still has a very large merchandise trade deficit. In simple terms, the country continues to import much more goods than it exports. The gap is partly offset by services exports and transfers from Indians abroad. This means that the improvement in the external account does not yet represent a complete change in India’s trade structure.
There is also an important distinction between a stronger external position and the reasons behind that strength. Some gains have a structural base, such as the rise in services exports and the greater role of overseas Indian workers in remittance flows. Other gains, especially the recent rise in foreign exchange reserves, have also received support from policy measures and capital flows.
The available data therefore support a balanced conclusion. India’s external position is stronger than it was in the past, but it would be premature to treat the entire improvement as a permanent shift.
The Current Account Has Become More Manageable
One of the clearest signs of external stability is the relatively small size of India’s current account deficit.
In FY2025-26, India’s current account deficit stood at $25.2 billion, or 0.6% of GDP. A deficit of this size is much easier to finance than a large external gap. It also provides more room for the economy to absorb changes in oil prices, global interest rates or capital flows.
However, the headline current account number does not tell the whole story. The merchandise trade deficit remains very large. India continues to rely on imports for several important goods, including energy, electronics, machinery and other manufactured products.
The improvement in the current account therefore comes in large part from the strength of the services account and transfers.
This distinction is important because a small current account deficit can exist even when the goods trade deficit remains high. The two numbers are not contradictory. Services exports and remittances can offset part of the merchandise gap.
India’s external position has therefore become more manageable, but the underlying trade structure remains an important issue.
Services Exports Are a Structural Strength
India’s services sector is perhaps the strongest structural support for the external account.
Services exports reached a record $387.6 billion in FY2025. In Q1 FY2026-27, net services receipts stood at $51.6 billion, compared with $47.9 billion in the same period a year earlier.
Computer services and business services remain important parts of this performance. India has built a large global presence in information technology, software, business-process services, professional services and related areas.
This strength is different from a short-term capital inflow. When an Indian company provides software, consulting, engineering, financial or other professional services to an overseas client, the resulting foreign exchange reflects an underlying economic activity.
That gives services exports a relatively durable quality.
The sector also has room for further expansion. Global firms continue to use Indian talent for technology and business services, while Indian companies have expanded their overseas operations. The exact pace of future growth cannot be assumed, but the existing export base is substantial.
The main qualification is that services exports cannot automatically eliminate the merchandise deficit. A strong services surplus can reduce the pressure created by goods imports, but it does not mean India has achieved a broad-based goods export transformation.
Remittances Add Another Major Cushion
Remittances provide another important source of foreign exchange.
Transfer receipts reached $42.9 billion in Q1 FY2026-27, compared with $33.2 billion a year earlier.
India has a large overseas population, and remittance flows have become an important part of the external account. The nature of these flows has also changed over time, with a greater contribution from skilled workers in several advanced economies.
Remittances have a useful feature from an external-balance perspective. They do not depend directly on India’s merchandise exports. They can therefore provide a separate source of foreign exchange when the goods trade balance remains under pressure.
At the same time, remittances should not be treated as an unlimited or guaranteed source of support. They depend on employment and income conditions in the countries where overseas Indians live and work. Changes in immigration rules, labour-market conditions, exchange rates or economic growth abroad can affect the amount sent to India.
The recent increase is therefore positive for the external account, but it should be assessed as part of a wider external framework rather than as a permanent substitute for export growth.
The Goods Trade Deficit Remains the Main Weakness
The merchandise account remains the clearest reminder that India’s external position has not undergone a complete transformation.
In Q1 FY2026-27, India’s merchandise trade deficit widened to $86.1 billion, compared with $68.9 billion a year earlier.
The April-July 2026 data also show the same basic pattern. The merchandise deficit stood at $117.8 billion, while the services surplus was $69.3 billion and transfers contributed $53.9 billion.
These numbers show how the external account works.
India has a large deficit on goods. Services exports cover a significant part of that deficit. Transfers, which include remittances, provide another major offset. The result can be a relatively modest current account deficit even when the merchandise gap remains large.
This model can remain stable if services and transfers continue to grow at a sufficient pace. But it also creates a point of dependence. A weaker services cycle, slower remittances or a sharp rise in import costs could put greater pressure on the current account.
The central long-term question is therefore not simply whether India can maintain a low current account deficit. It is whether the country can increase its goods export capacity while retaining its services advantage.
Foreign Exchange Reserves Provide a Large Buffer
India’s foreign exchange reserves have also reached a very high level.
In September 2026, reserves reached a record $785.7 billion.
A large reserve stock gives the country a useful cushion during periods of external stress. It can help reduce the immediate effect of sudden capital outflows, higher oil prices or pressure in global financial markets.
However, the size of reserves should not be viewed in isolation.
The composition and source of reserve accumulation also matter. Recent reserve growth has been supported by foreign-currency funding and non-resident deposit flows after policy measures introduced in June. According to reported data, the Reserve Bank of India had garnered $136.3 billion through these channels between June and August.
Such flows can add to the reserve stock and improve short-term liquidity. However, they can also create future obligations. A deposit or borrowing inflow is not the same as an export receipt. It provides foreign exchange today but can also create a liability that may require repayment or withdrawal later.
For this reason, a rise in reserves does not automatically mean that the underlying external position has improved by the same amount.
The Net International Position Has Improved
Another useful measure is the relationship between India’s external assets and external liabilities.
The ratio of international financial assets to liabilities rose to 85.2% in March 2026, from 77.5% a year earlier. At the same time, net claims of non-residents on India fell to 5.9% of GDP, compared with 9.0% a year earlier.
This is an important development because it looks beyond the current year’s trade balance.
A country’s external position depends not only on annual exports and imports but also on the stock of assets and liabilities built up over many years. A stronger external asset position can provide additional resilience.
The improvement therefore supports the view that at least part of India’s external progress has a structural basis.
Still, this measure should be read alongside external debt and capital flows. A better net position does not remove the need to assess the quality, maturity and currency composition of external liabilities.
External Debt Is a Counterweight
India’s external debt reached $762.8 billion in March 2026, equal to 20.8% of GDP, compared with 19.8% a year earlier.
The increase does not by itself establish an external vulnerability. The appropriate assessment also depends on factors such as reserve cover, debt maturity, currency exposure, interest costs and the nature of the borrowers.
India’s large reserve stock provides an important buffer against external financing stress. The external debt ratio also remains a more useful measure than the absolute debt number because the size of the economy matters.
Nevertheless, the rise in external debt is relevant when assessing the quality of the recent reserve increase. If reserve growth comes partly through additional external liabilities, the improvement is different from one based on stronger export earnings or higher equity investment.
This is why the external account needs to be assessed as a complete balance sheet rather than through a single indicator.
Policy Support Has Helped Create a Wider Window
Policy has played a role in the recent improvement.
Measures that attract foreign-currency deposits and other capital can strengthen liquidity and increase the foreign exchange available to the financial system. Such measures can be useful when global conditions create pressure on emerging markets.
But their effect is different from a permanent improvement in productive capacity.
A policy measure can create a window of greater external comfort. The window can last for some time if market conditions remain favourable. However, the underlying liabilities associated with the inflows must also be considered.
The same principle applies to portfolio capital. Portfolio flows can provide substantial foreign exchange when global investors have a positive view of Indian assets. They can also reverse more quickly than trade receipts or long-term export earnings.
Foreign direct investment has a different character because it can bring capital, technology, management expertise and access to overseas markets. Its long-term value therefore depends partly on whether it increases domestic productive capacity and export potential.
The distinction between different types of capital is consequently important when judging the durability of the external improvement.
A Simple View of the External Balance
| Area | Recent data | What it suggests |
|---|---|---|
| Current account deficit, FY2025-26 | $25.2 billion / 0.6% of GDP | External deficit remains relatively modest |
| Services exports, FY2025 | $387.6 billion | Strong structural support |
| Net services receipts, Q1 FY2026-27 | $51.6 billion vs $47.9 billion | Services surplus continued to grow |
| Transfer receipts, Q1 FY2026-27 | $42.9 billion vs $33.2 billion | Remittances provided a stronger cushion |
| Merchandise deficit, Q1 FY2026-27 | $86.1 billion vs $68.9 billion | Goods gap remains large |
| Merchandise deficit, April-July 2026 | $117.8 billion | Goods imports remain a major external pressure |
| Services surplus, April-July 2026 | $69.3 billion | Services offset a large part of goods deficit |
| Transfers, April-July 2026 | $53.9 billion | Transfers added another major offset |
| FX reserves, September 2026 | $785.7 billion | Large external liquidity buffer |
| Foreign-currency flows, June-August 2026 | $136.3 billion | Policy-assisted capital inflow was significant |
| International assets/liabilities, March 2026 | 85.2% vs 77.5% | External balance sheet improved |
| Net claims of non-residents | 5.9% of GDP vs 9.0% | Net external position improved |
| External debt, March 2026 | $762.8 billion / 20.8% of GDP | External liabilities also increased |
What Would Make the Improvement Durable?
The most important test will be the behaviour of the external account under less favourable conditions.
If global oil prices rise sharply, India’s import bill can increase. If global interest rates stay high, external borrowing can become more expensive. If global demand weakens, services exports and merchandise exports can face pressure. If international investors reduce exposure to emerging markets, portfolio flows can reverse.
A durable external position should be able to absorb at least some of these shocks without a major disruption.
India’s services sector gives it an important advantage. Its remittance base provides another source of foreign exchange. Its reserve stock gives the authorities a substantial liquidity buffer. The improvement in the net international position also adds support.
The remaining challenge is the merchandise trade balance.
A sustained rise in manufacturing exports would make the external account less dependent on services and transfers. Greater domestic production of imported goods could also reduce some import pressure, although the effect would depend on the specific sectors and the cost of domestic production.
This does not mean India must eliminate its goods deficit. A growing economy can reasonably run a goods deficit if it imports capital goods, energy and technology that support future production. The relevant question is whether the external deficit remains financeable and whether the associated capital is used in a productive manner.
Structural Change and Policy Support Can Exist Together
It is not necessary to choose between the two explanations.
India can experience a genuine structural improvement while also benefiting from temporary policy support.
The rise in services exports and remittances has a structural element. The improvement in the international asset-liability position also points to a broader change. At the same time, the sharp reserve increase has received support from foreign-currency funding, deposits and other capital flows.
This combination is probably the most useful way to read the current situation.
The external position is not simply a temporary result of government or central-bank action. Nor is it evidence that all external vulnerabilities have disappeared.
Instead, India has developed stronger sources of foreign exchange, while policy has helped widen the available external liquidity buffer.
The Role of the IMF Assessment
The International Monetary Fund has also offered a relevant perspective. Its assessment of India’s FY2024-25 external position found it moderately stronger than implied by medium-term fundamentals.
The IMF also expected the current account deficit to move closer to its underlying norm over time. Its assessment highlighted India’s trade and capital-account restrictions as factors that can affect export and investment potential.
This provides useful context. A strong external position in one period does not necessarily mean that the economy has reached a new permanent equilibrium.
External balances depend on domestic saving, investment, trade competitiveness, commodity prices, exchange rates and global financial conditions. These factors can change over time.
Conclusion
India’s external position has clearly become stronger.
The current account deficit was only 0.6% of GDP in FY2025-26, services exports reached $387.6 billion in FY2025, transfer receipts rose to $42.9 billion in Q1 FY2026-27, and foreign exchange reserves reached $785.7 billion in September 2026.
The international balance sheet also improved. The ratio of international financial assets to liabilities rose to 85.2%, from 77.5%, while net claims of non-residents fell to 5.9% of GDP, from 9.0%.
These figures provide evidence of a stronger external position.
But the merchandise deficit remains large. It reached $86.1 billion in Q1 FY2026-27, and the April-July 2026 deficit stood at $117.8 billion. At the same time, external debt rose to $762.8 billion, or 20.8% of GDP.
The recent rise in reserves also received substantial support from foreign-currency flows, with $136.3 billion garnered through relevant channels between June and August 2026.
The most balanced interpretation is therefore that India has achieved a real improvement in external resilience, combined with a policy-assisted period of unusually strong external liquidity.
Whether this becomes a durable shift will depend on what happens next. Continued growth in services exports and remittances would support the improvement. A stronger goods export base would make it broader. A manageable external debt burden would improve its quality. By contrast, continued dependence on external borrowing or short-term capital flows would make the picture more sensitive to global financial conditions.
For now, the evidence supports neither a claim that India has fully solved its external-balance problem nor a claim that the improvement is merely temporary. The data point to a more nuanced outcome: the foundation is stronger, but the durability of the new external position still depends on the composition of growth, trade and capital flows.
