India: Plugging The Current Account Hole And Our Forecasts

The US-Iran war has caused a significant current account deficit in India due to trade disruptions and higher energy import costs. The government and RBI are implementing structural reforms to boost capital inflows, though the impact on the INR remains linked to the management of the central bank's FX forward book.

Key Takeaways

• 1.The US-Iran war has disrupted trade routes via the Strait of Hormuz, creating a USD83.23bn (c. 2% of GDP) hole in India's current account.
• 2.The RBI and government have introduced significant structural reforms to attract USD95-130bn in capital inflows over two years to offset current account pressures.
• 3.USD/INR forecasts are being revised higher (96 for Q3/Q4 2026) due to the terms-of-trade shock, weak monsoon threats, and the RBI's potential use of inflows to unwind its large forward book.

Table of Contents

• India: plugging the current account hole & our forecasts
• A temporary current account surplus
• Estimating the current account hole
• Trade with the Middle East
• India's imports from the Middle East
• The alternatives to the Middle East's oil
• Energy (Liquefied Petroleum Gas (LPG))
• The alternatives to the Middle East's LPG
• Can renewables offset the loss in oil and gas imports?
• Gold, precious stones and jewellery (PM)
• The alternatives to the Middle East's PMs
• Organic chemicals
• The alternatives to the Middle East's organic chemicals
• Other import categories
• India's exports to the Middle East
• Electronics
• Other export categories to the Middle East
• The Middle East and remittances
• What does this mean for the INR?
• Unwinding the RBI's forward book
• Conclusion

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