Stronger capital inflows and higher foreign direct investment are expected to support India’s external position, while Kotak projects a 50-basis-point rate hike in the second half of FY27 despite a softer inflation outlook.
India is likely to record a balance of payments (BoP) surplus in FY27, aided by stronger capital inflows and higher foreign direct investment (FDI), according to a report by Kotak Mahindra Mutual Fund.
The report said capital inflows following special measures taken by the Reserve Bank of India (RBI), along with an increase in gross FDI, are expected to strengthen India’s external position during the current financial year.
Gross FDI inflows stood at $30.7 billion in the first quarter of FY27, up from $26.7 billion in the corresponding period last year.
“On account of capital inflows on account of special measures taken by the RBI and gross FDI in Q1, which is higher at USD 30.7 billion as compared to $26.7 billion last year, India will have a BOP surplus this year,” the report said.
Kotak described the RBI’s latest monetary policy stance as balanced, with the central bank revising its inflation and economic growth projections.
The headline inflation forecast for FY27 has been lowered to 5 per cent from 5.1 per cent following lower-than-expected inflation during the first quarter.
Kotak also expects core inflation to average around 4.3 per cent in FY27 and gradually move towards 4 per cent by the end of the financial year.
Meanwhile, improving domestic economic activity and easing supply-side pressures have led to an upward revision in the FY27 GDP growth forecast to 6.7 per cent.
More from BusinessKotak expects 50 bps rate hike in second half
Despite the relatively benign inflation outlook, Kotak continues to expect the RBI to raise interest rates by a cumulative 50 basis points during the second half of FY27.
The expectation is based partly on the RBI’s inflation projection of 5.3 per cent for the first quarter of FY28 and the possibility of monetary tightening by the US Federal Reserve during the year.
Kotak said the anticipated rate hike is already largely reflected in the current yield curve, potentially limiting the impact on longer-duration government bonds.
At the same time, additional liquidity generated through foreign currency non-resident (FCNR) inflows could provide support to the bond market.
The report expects the benchmark 10-year government security yield to remain within a range of 6.70-6.90 per cent until the RBI’s next monetary policy review.
FCNR-related liquidity, however, could result in a 15-20 basis point decline in shorter-end bond yields by September 2026.
What should debt investors do?
For debt mutual fund investors, Kotak recommended aligning fund selection with investment horizons and individual risk appetite.
Investors with a minimum three-month horizon may consider ultra-short-term, money market and low-duration funds, according to the report.
Those with an investment horizon of at least 12 months may consider corporate bonds, short-duration and banking and PSU funds.
For investors with horizons exceeding 18 months, Kotak suggested gilt funds, dynamic bond funds, long-duration funds, income plus arbitrage funds of funds and target maturity funds.
