The RBI Annual Report FY 2025-26 presents a remarkably resilient external-sector story despite tariff uncertainty, geopolitical tensions and volatile global financial conditions. Merchandise exports increased only modestly to US$441.7 billion, while imports rose much faster to US$775.0 billion, widening the merchandise trade deficit to US$333.2 billion. Yet the pressure on the current account was substantially cushioned by India’s powerful services exports and remittance receipts. Consequently, the current account deficit (CAD) was contained at US$30.2 billion, or 1.1% of GDP, during April-December 2025, compared with 1.3% a year earlier. At the same time, net capital flows fell short of financing requirements, causing a US$30.8 billion BoP-based depletion in foreign exchange reserves during April-December 2025.
For RBI Grade B, UPSC, banking examinations and interviews, this chapter is high priority because it brings together trade, CAD, invisibles, services, remittances, FDI, FPI, ECBs, non-resident deposits, external debt and reserve adequacy.
1. The Big Picture: India’s External Sector Remained Resilient
The RBI’s conclusion is important.
Despite a widening merchandise trade deficit, India’s external-sector vulnerability remained low because of:
- sustained growth in services exports,
- strong private transfer receipts,
- ample foreign exchange reserves,
- modest external debt liabilities.
However, portfolio flows recorded net outflows and overall net capital flows were insufficient to fully finance the external financing requirement.
The story can therefore be remembered as:
Large merchandise trade deficit
↓
Strong services exports + remittances
↓
CAD contained
↓
Capital flows insufficient to cover CAD
↓
Forex reserves declined on BoP basis
↓
But external vulnerability remained contained
That sequence is extremely important for descriptive examination answers.
2. Merchandise Trade: Exports vs Imports
India’s merchandise trade expanded in 2025-26, but imports grew much faster than exports.
| Indicator | 2024-25 | 2025-26 | Growth |
|---|---|---|---|
| Merchandise exports | US$437.7 bn | US$441.7 bn | 0.9% |
| Merchandise imports | US$720.2 bn | US$775.0 bn | 7.6% |
| Trade deficit | US$282.5 bn | US$333.2 bn | — |
Thus:
Exports: +0.9%
but
Imports: +7.6%
This explains the sharp widening of the merchandise trade deficit.
3. The Merchandise Trade Deficit
The merchandise trade deficit increased from:
US$282.5 billion in 2024-25
to:
US$333.2 billion in 2025-26
The report identifies the oil deficit as the largest contributor to the merchandise trade deficit. Trade deficits with China and Switzerland also widened.
Exam Point
Do not confuse:
Trade deficit with current account deficit.
A trade deficit covers merchandise trade.
CAD additionally incorporates:
- services,
- income,
- transfers and other current-account components.
India’s large services surplus and remittances therefore help offset the merchandise deficit.
4. What Drove India’s Merchandise Exports?
The expansion in merchandise exports was led by:
- Electronic goods
- Engineering goods
- Meat, dairy and poultry products
- Marine products
- Mica, coal and other ores/minerals, including processed minerals
At the same time, exports contracted in:
- petroleum products,
- gems and jewellery,
- rice,
- plastic and linoleum,
- cotton and handloom products.
5. Electronics: A Major Export Bright Spot
Electronic goods were the fastest-growing major export category.
Their exports grew by:
24.4%
during 2025-26.
Mobile phones were particularly important.
They accounted for approximately:
61% of electronic-goods exports
and were exempted from the tariffs imposed by the US.
The report therefore highlights electronics as a major driver of India’s changing export composition.
Exam Memory
Electronic-goods export growth = 24.4%
Mobile phones = around 61% of electronic-goods exports
6. Tariff Uncertainty and India’s US Exports
India’s merchandise exports to the United States faced greater pressure from heightened tariffs.
During:
April-August 2025
exports to the US showed positive growth, partly because exporters front-loaded shipments in anticipation of higher tariffs.
Exports also benefited from sectors exempted from US tariffs.
After that, except for November 2025, exports to the US contracted from September 2025 onward.
Why is front-loading important?
The sequence is:
Expectation of higher future tariffs
↓
Exporters ship goods earlier
↓
Short-term increase in exports
↓
Subsequent moderation/contraction
This is a classic trade-policy effect and a useful analytical point for exams.
7. China Became India’s Largest Trading Partner
One of the major developments highlighted by the report:
China became India’s largest trading partner in 2025-26, overtaking the US.
This occurred amid the broader trade reconfiguration associated with tariff developments and changing global supply chains.
This is an important current-affairs fact for:
- RBI Grade B,
- UPSC,
- interviews,
- international economics questions.
8. Merchandise Imports: What Increased?
India’s import expansion was led by:
- electronic goods,
- gold,
- machinery,
- electrical and non-electrical equipment.
The largest positive contributions to import growth came from:
| Category | Growth |
|---|---|
| Electronic goods | 17.7% |
| Gold | 24.1% |
| Machinery, electrical & non-electrical | 15.3% |
| Silver | 149.6% |
| Fertilisers | 60.7% |
9. Oil Imports: Quantity Up, Value Down
This is one of the most interesting developments in the report.
Petroleum, oil and lubricants (POL) accounted for:
22.4% of India’s total merchandise imports
in 2025-26.
The volume of POL imports increased, but the value declined, because oil prices contracted.
This distinction is important:
Higher import volume does not necessarily mean higher import value.
If the quantity rises but international prices fall sufficiently, the total import bill can still decline.
10. Changing Sources of Crude Oil
The composition of India’s crude-oil suppliers also changed.
The report notes that the share of:
- Russia,
- Iraq
declined during the year.
Meanwhile, the shares of:
- Saudi Arabia,
- UAE,
- US
increased.
This reflects the continuing importance of diversification in India’s energy imports.
11. Gold Imports Increased in Value
Gold imports increased in value during 2025-26.
The report explains that a contraction in gold-import volume was offset by:
higher international gold prices.
Again, the lesson is:
Import value = quantity × price effect
A lower quantity does not automatically translate into a lower import bill.
12. Trade Agreements and Export Diversification
India continued its trade-diversification efforts.
As of April 2026, India had signed:
24 trade agreements
The report highlights agreements with:
- United Kingdom — CETA, July 24, 2025
- Oman — CEPA, December 18, 2025
- New Zealand — FTA, April 27, 2026
The India-EU FTA negotiations were concluded on:
January 27, 2026
The agreements mentioned had not yet been enforced as of the report’s stated position.
Exam Point
The broader objective is:
Trade diversification → reduced dependence on individual markets → greater resilience against trade shocks.
13. Invisibles: India’s External-Sector Shock Absorber
The term invisibles is critical.
They include cross-border transactions relating to:
- services,
- income,
- transfers.
For India, the most important strength within invisibles has been:
services exports
and
private transfer receipts/remittances.
These help offset the merchandise trade deficit.
14. Services Exports: India’s Major Strength
During April-December 2025:
Net services exports grew 15.3% year-on-year.
The growth was driven mainly by:
- software services,
- business services.
Together, software and business services accounted for:
77.8% of services exports.
This is one of the most important external-sector numbers in the report.
Remember:
Net services exports growth = 15.3%
Software + business services = 77.8% of services exports
15. Transportation and Travel Services
Not every services segment performed strongly.
Transportation receipts contracted by:
7.3%
during April-December 2025, largely because of lower sea freight.
Travel services also contracted because of:
lower foreign tourist arrivals.
Thus, India’s services surplus was strong but not uniform across all categories.
16. Why India’s IT Services Outlook Remained Positive
The report notes that robust global IT spending projections were favourable for India’s software-services exports.
This is strategically important.
India’s external-sector resilience increasingly depends not only on physical merchandise exports but also on:
high-value services exports.
17. Remittances: Another Major Strength
Private transfer receipts, primarily remittances from Indians working overseas, grew by:
10.1%
during April-December 2025.
This was slower than the 16.2% growth recorded during the corresponding period a year earlier, but still robust.
Remittances are important because they provide a stable source of foreign exchange and help finance India’s current-account deficit.
18. Cost of Sending Remittances
The average cost of sending:
US$200 to India
stood at:
5.3%
in Q3:2025.
This was:
- unchanged from a year earlier,
- below the global average of 6.4%,
- but still above the SDG target of 3% by 2030.
Exam Point
India remittance cost = 5.3%
Global average = 6.4%
SDG target = 3% by 2030
19. Primary Income Outgo Increased
India’s net outgo under the primary income account was:
US$37.2 billion
during April-December 2025.
It was:
US$36.5 billion
in the corresponding period of 2024.
The increase reflected higher payments of:
- dividends,
- reinvested earnings,
associated with inward FDI.
This is another reason why strong services and remittances are essential for keeping the CAD manageable.
20. Current Account Deficit: The Key Number
Now comes the most important external-sector number.
During April-December 2025:
CAD = US$30.2 billion
or:
1.1% of GDP
Compared with:
US$36.7 billion
or:
1.3% of GDP
during April-December 2024.
This is a crucial conceptual point.
How did CAD fall despite the trade deficit widening?
Because:
Wider merchandise trade deficit
was substantially offset by:
strong services exports + strong remittance receipts.
That is the central external-sector story of FY 2025-26.
21. Trade Deficit vs CAD — Don’t Make This Mistake
A very common examination mistake is to assume:
“Trade deficit increased, therefore CAD must increase.”
Not necessarily.
India’s:
Merchandise trade balance
may deteriorate while:
Services balance + transfers
improve sufficiently to keep the CAD contained.
In FY 2025-26:
Merchandise trade deficit widened
but
CAD fell to 1.1% of GDP during April-December.
This is a perfect example of why the current account must be analysed as a whole.
22. Capital Flows: The Weak Spot
The global environment for international investment remained challenging.
During April-December 2025:
Net capital flows fell short of CAD.
As a result, India’s foreign exchange reserves declined by:
US$30.8 billion
on a balance-of-payments basis, excluding valuation effects.
Important distinction
A change in forex reserves can arise because of:
- actual balance-of-payments transactions,
- valuation changes.
The report’s US$30.8 billion figure is specifically a BoP-based depletion excluding valuation effects.
23. FDI: A Positive Capital-Flow Story
Foreign direct investment performed better than several other capital-flow components.
The report states that FDI was higher on both:
- gross basis,
- net basis.
India also ranked:
Second globally in greenfield FDI announcements during 2025-26
after the United States, according to fDi Markets.
24. Net FDI and Gross FDI Numbers
The capital-flow table gives:
| Capital Flow | 2024-25 | 2025-26 |
|---|---|---|
| Net FDI | US$1.0 bn | US$7.7 bn |
| Net inward FDI | US$29.1 bn | US$40.9 bn |
| Gross inflows | US$80.6 bn | US$94.5 bn |
| Repatriation/disinvestment | US$51.5 bn | US$53.6 bn |
| Net outward FDI | US$28.2 bn | US$33.3 bn |
Exam Memory
Gross inward FDI = US$94.5 billion
Net inward FDI = US$40.9 billion
Net FDI = US$7.7 billion
25. Which Sectors Attracted FDI?
Services accounted for the largest share of FDI equity flows, followed by manufacturing.
The services sector accounted for around:
44%
of total FDI equity flows in 2025-26.
This was higher than its average share of around 38% during 2021-22 to 2024-25.
Major source countries included:
- Singapore,
- US,
- Mauritius,
- Japan,
- Netherlands,
- UAE.
Together they contributed approximately:
four-fifths of FDI flows.
26. Outward FDI from India
India’s outward FDI also increased.
Major destinations included:
- Singapore,
- US,
- UAE,
- Mauritius.
The main sectors for outward FDI were:
- financial, insurance and business services,
- manufacturing,
- wholesale/retail trade,
- restaurants and hotels.
27. FPI: The Major Source of Pressure
Foreign portfolio investment was much less supportive.
During 2025-26:
Net FPI outflows = US$16.5 billion
The outflows were driven primarily by the equity segment.
In March 2026 alone:
US$13.1 billion
of net FPI outflows occurred.
The immediate trigger was the outbreak of the West Asia conflict on February 28, 2026.
28. Debt FPI Was More Resilient
The debt segment actually recorded:
US$2.1 billion of inflows
during 2025-26.
The report attributes this to investor preference for relatively safer assets amid global uncertainty.
This mirrors a broader financial-market pattern:
Risk-off environment
→ equity flows become vulnerable
→ investors may prefer debt assets.
29. ECBs and Non-Resident Deposits
External commercial borrowings (ECBs) recorded:
US$12.0 billion net inflows
in 2025-26.
Non-resident deposits recorded:
US$14.4 billion net inflows.
For ECBs, funds were used for purposes including:
- on-lending/sub-lending,
- refinancing earlier ECBs,
- importing capital goods,
- new projects.
30. External Vulnerability: India Remained Well Protected
The RBI monitors several external vulnerability indicators.
At end-December 2025:
| Indicator | End-Dec 2025 |
|---|---|
| External debt/GDP | 20.4% |
| Short-term debt/original maturity to total debt | 19.7% |
| Short-term debt/residual maturity to total debt | 43.2% |
| Reserves/total external debt | 89.8% |
| Short-term debt/original maturity to reserves | 21.9% |
| Short-term debt/residual maturity to reserves | 48.1% |
| Reserve cover of imports | 10.8 months |
| Debt-service ratio | 5.8% |
| External debt | US$765.5 bn |
| NIIP | –US$260.5 bn |
| NIIP/GDP | –7.1% |
| CAB/GDP | –1.1% |
31. External Debt-to-GDP Ratio
India’s external debt-to-GDP ratio stood at:
20.4% at end-December 2025
compared with:
- 19.8% at end-March 2025,
- 19.2% at end-March 2024.
Thus, while external debt increased, it remained at a relatively contained level relative to the size of the economy.
32. Forex Reserves and Import Cover
Foreign exchange reserves remained an important external-sector buffer.
At end-December 2025, reserves covered approximately:
10.8 months of merchandise imports
The report further notes that at end-March 2026, import cover for goods and services was around:
9 months.
This is a crucial measure of reserve adequacy.
What does import cover mean?
It broadly indicates how many months of imports could theoretically be financed using available foreign exchange reserves, subject to the methodology used.
33. Reserves to External Debt
At end-December 2025:
Reserves / Total External Debt = 89.8%
This means India’s reserves were equivalent to almost nine-tenths of its total external debt stock under the indicator used in the report.
This provides an important buffer against external financing risks.
34. Debt Service Ratio
The external debt-service ratio stood at:
5.8%
during the relevant April-December 2025 period.
The ratio measures external debt-service payments relative to current receipts and provides an indication of the burden of servicing external debt.
35. Net International Investment Position
India’s net international investment position (NIIP) was:
–US$260.5 billion
at end-December 2025.
The NIIP-to-GDP ratio improved to:
–7.1%
from –9.0% at end-March 2025.
What is NIIP?
It broadly represents:
India’s external financial assets − India’s external financial liabilities.
A negative NIIP means external liabilities exceed external assets.
The improvement in the ratio indicates a reduction in the net external liability position relative to GDP.
36. Why Did Forex Reserves Decline Despite a Low CAD?
This is a very likely conceptual question.
The answer lies in the financing side of the balance of payments.
The sequence was:
CAD = US$30.2 billion
↓
Net capital flows insufficient to finance CAD
↓
Financing gap
↓
BoP-based reserve depletion = US$30.8 billion
Therefore:
A low CAD does not automatically mean forex reserves must increase.
What matters is the relationship between the current-account balance and net capital flows.
37. The External-Sector Balance Sheet
Think of India’s external sector through three major blocks.
Block 1 — Trade
Merchandise exports:
US$441.7 bn
Merchandise imports:
US$775.0 bn
Trade deficit:
US$333.2 bn
Block 2 — Invisibles
Strong:
- services exports,
- remittances.
Block 3 — Capital Account/Financial Flows
Positive:
- FDI,
- ECBs,
- non-resident deposits,
- debt FPI.
Negative:
- equity FPI outflows.
The final result:
CAD contained, but reserves depleted on BoP basis.
38. Most Important External-Sector Numbers
If you have limited revision time, memorise these first.
Trade
- Merchandise exports: US$441.7 bn
- Merchandise imports: US$775.0 bn
- Merchandise trade deficit: US$333.2 bn
- Export growth: 0.9%
- Import growth: 7.6%
Services & Remittances
- Net services exports growth: 15.3%
- Software + business services share: 77.8%
- Remittance growth: 10.1%
- Remittance cost: 5.3%
Current Account
- CAD: US$30.2 bn
- CAD/GDP: 1.1%
- Previous-year comparable CAD/GDP: 1.3%
Capital Flows
- Net FDI: US$7.7 bn
- Gross inward FDI: US$94.5 bn
- Net inward FDI: US$40.9 bn
- Net FPI: –US$16.5 bn
- Net ECB: US$12.0 bn
- Non-resident deposits: US$14.4 bn
External Vulnerability
- External debt/GDP: 20.4%
- External debt: US$765.5 bn
- Reserves/external debt: 89.8%
- Import cover: 10.8 months at end-Dec 2025
- Debt-service ratio: 5.8%
- NIIP/GDP: –7.1%
- Reserve depletion on BoP basis: US$30.8 bn
39. Most Probable RBI Grade B / UPSC Questions
Q1. What was India’s merchandise trade deficit in 2025-26?
US$333.2 billion.
Q2. What was India’s merchandise export growth?
0.9%.
Q3. What was merchandise import growth?
7.6%.
Q4. Which major export category recorded 24.4% growth?
Electronic goods.
Q5. What percentage of electronic-goods exports were mobile phones?
Around 61%.
Q6. Which country became India’s largest trading partner in 2025-26?
China.
Q7. What was net services-export growth during April-December 2025?
15.3%.
Q8. What percentage of services exports came from software and business services?
77.8%.
Q9. What was India’s CAD during April-December 2025?
US$30.2 billion, or 1.1% of GDP.
Q10. What were net FPI flows during 2025-26?
Outflows of US$16.5 billion.
Q11. How much did forex reserves decline on a BoP basis during April-December 2025?
US$30.8 billion, excluding valuation effects.
Q12. What was India’s external debt-to-GDP ratio at end-December 2025?
20.4%.
Q13. What was India’s reserve cover of imports at end-December 2025?
10.8 months.
Q14. What was India’s external debt at end-December 2025?
US$765.5 billion.
Q15. What was the NIIP/GDP ratio?
–7.1%.
RBI Annual Report FY 2025-26 — Key Takeaways
- India’s external sector remained broadly resilient despite global uncertainty.
- Merchandise exports increased 0.9% to US$441.7 billion.
- Merchandise imports increased 7.6% to US$775.0 billion.
- Merchandise trade deficit widened to US$333.2 billion.
- Electronics were a major export growth driver, with 24.4% growth.
- Mobile phones accounted for around 61% of electronic-goods exports.
- China became India’s largest trading partner, overtaking the US.
- Net services exports grew 15.3% during April-December 2025.
- Software and business services accounted for 77.8% of services exports.
- Private transfer receipts/remittances grew 10.1%.
- CAD was contained at US$30.2 billion, or 1.1% of GDP.
- Net FDI increased to US$7.7 billion.
- Gross inward FDI reached US$94.5 billion.
- Net FPI recorded US$16.5 billion outflows.
- March 2026 alone saw US$13.1 billion of net FPI outflows.
- Net capital flows fell short of the CAD requirement.
- Forex reserves declined by US$30.8 billion on a BoP basis, excluding valuation effects, during April-December 2025.
- External debt/GDP stood at 20.4% at end-December 2025.
- Reserve cover stood at 10.8 months of imports at end-December 2025.
- The RBI concluded that India’s external vulnerability remained low because of strong services exports, remittances, forex reserves and modest external debt liabilities.
Final Exam Framework: How to Write an External-Sector Answer
If RBI Grade B asks:
“Assess the resilience of India’s external sector in 2025-26.”
Use this structure:
1. Start with the shock:
Global trade uncertainty, tariffs and geopolitical tensions.
2. Merchandise trade:
Exports grew only 0.9%, while imports grew 7.6%, widening the trade deficit to US$333.2 billion.
3. Offset through invisibles:
Services exports grew strongly and remittances remained robust.
4. CAD:
Despite the wider trade deficit, CAD was contained at 1.1% of GDP during April-December 2025.
5. Capital flows:
FDI strengthened, but FPI recorded net outflows.
6. Reserve impact:
Net capital flows fell short of CAD, leading to US$30.8 billion BoP-based reserve depletion.
7. Vulnerability:
External debt remained moderate, reserves provided substantial import cover, and external-sector buffers remained strong.
8. Conclusion:
India’s external resilience increasingly rests on the combination of services exports + remittances + diversified capital flows + adequate forex reserves + contained external debt.
That is the analytical story—not simply “exports good, imports bad.”
Final Revision Capsule
TRADE
Exports ₹? No — US$441.7 bn
Imports = US$775.0 bn
Trade deficit = US$333.2 bn
INVISIBLES
Services growth = 15.3%
Software + Business = 77.8%
Remittances growth = 10.1%
CURRENT ACCOUNT
CAD = US$30.2 bn
CAD/GDP = 1.1%
CAPITAL FLOWS
Net FDI = +US$7.7 bn
Net FPI = –US$16.5 bn
Net ECB = +US$12.0 bn
NRI deposits = +US$14.4 bn
EXTERNAL VULNERABILITY
External Debt/GDP = 20.4%
External Debt = US$765.5 bn
Reserves/External Debt = 89.8%
Import Cover = 10.8 months
Debt Service Ratio = 5.8%
NIIP/GDP = –7.1%
CORE LOGIC
Wider merchandise trade deficit
↓
Strong services + remittances
↓
CAD contained at 1.1% GDP
↓
Capital flows insufficient to finance CAD
↓
Forex reserves depleted by US$30.8 bn on BoP basis
↓
But overall external vulnerability remained low
This chain is one of the highest-value revision frameworks in the RBI Annual Report FY 2025-26 for RBI Grade B Phase II and interview preparation.
Next Part — Part 10:
RBI Annual Report FY 2025-26: Monetary Policy — MPC Decisions, Repo Rate, Inflation Targeting, Policy Stance and the Monetary Policy Framework