Banking capital and external commercial borrowings could drive a sharp rise in India’s capital account flows, potentially pushing the balance of payments into a $61-billion surplus despite a wider current account deficit.
India’s capital account flows could surge to around $120 billion in FY2027, up sharply from just $2 billion in FY2026, driven primarily by higher banking capital and external commercial borrowings (ECBs), according to a strategy report by Kotak Institutional Equities.
Kotak estimates that banking capital could account for the bulk of the expected inflows, at around $80 billion, including nearly $70 billion through Foreign Currency Non-Resident (Bank), or FCNR(B), deposits. External commercial borrowings are estimated to contribute another $20 billion.
The sharp improvement in capital flows could significantly strengthen India’s external position and offset pressure from a widening current account deficit (CAD), the report said.
BoP surplus seen at $61 billion
In its base-case scenario, Kotak expects India to post a balance of payments (BoP) surplus of $61 billion in FY2027, even as the current account deficit widens.
The brokerage estimates the CAD at 1.2 per cent of GDP in FY2027, compared with 0.6 per cent, or $25 billion, in FY2026. Its projection assumes an average crude oil price of $85 per barrel.
Kotak described the potential strength in the balance of payments as somewhat paradoxical, with stronger capital flows likely to compensate for a weaker current account.
More from BusinessNet FDI flows may remain subdued
Despite the expected surge in overall capital account flows, Kotak said net foreign direct investment (FDI) flows could remain weak.
The brokerage attributed this to potentially elevated private equity and venture capital outflows, along with higher overseas investments by Indian companies.
Data cited in the report showed that India’s net FDI inflows have moderated sharply in recent years as gross outflows have increased. Net FDI inflows stood at $6.9 billion in FY2026, down significantly from $44 billion in FY2021.
FPI flows likely to remain volatile
Foreign portfolio investment (FPI) flows could remain volatile, depending on the relative risk-reward profile of India compared with other global markets, Kotak said.
However, the brokerage noted some improvement in FPI flows over the past two months, led by debt inflows amid expectations of India’s inclusion in the Bloomberg Global Aggregate Index, along with moderate equity inflows.
Overall, Kotak’s assessment suggests that stronger banking capital, FCNR(B) deposits and ECBs could provide a significant cushion for India’s external accounts in FY2027, particularly as higher energy import costs and a wider current account deficit pose risks to the economy.
