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The 4Q balance-of-payment (BoP) release showed a bigger gap between the actual BoP deficit and RBI’s dollar sales in 2HFY26. A 4Q current-account surplus brought the FY26 CAD to just US$25bn (0.6% of GDP), and despite weak capital inflows, the 2HFY26 BoP deficit was only US$19bn. However, in 2H the RBI had to intervene by US$70bn across spot and forwards currency markets. This large US$51bn divergence in just six months in our view is due to a rise in hedging (importers and investors) and its retention offshore by exporters. With external debt to GDP still low, RBI and/or government have rightly announced measures to bring in dollars, and stem the palpable of anxiety on the INR.
FY26 CAD at 0.6% of GDP, 4Q current account in surplus as expected
In 4Q, India’s current account was $7bn in surplus, cutting FY26 to a to deficit $25bn (CAD; +$2bn vs. FY25). The YoY rise in goods deficit ($50bn) was offset by higher services surplus ($28bn) and invisibles ($20bn). CAD has been steady at 0.6% of GDP during FY24-26. Despite higher oil prices, Apr-26 data shows a CAD run-rate at 2% of GDP.
Capital flows: weak FDI inflows, higher FPI outflows and high speculative bets
The rise in FDI repatriation and outbound FDI over FY24-26 have negated the strong inbound FDI, raising dependence on volatile portfolio flows to finance the CAD. Net FDI collapsed to $1bn in FY25 vs. average US$33bn during FY20–FY24. Further, outflows due to derivatives averaged $23bn in the last 2 FY vs. $4bn FY20-24
Quantum of RBI intervention much worse than the balance of payments deficit
However, even after weak capital flows the balance-of-payments (BoP) deficit in 2HFY26 was only US$19bn, much lower than RBI’s FX intervention of US$70bn, despite which the INR fell 9% against the USD. This $51bn gap has been the main pressure point for the INR, and in our view reflects a rise in retention of dollars abroad and in excessive hedging by importers and foreign investors (both FPI and PE/VC.
This anxiety has intensified now due to uncertainty on how long the Strait of Hormuz stays closed, with the 12-month forward average oil price rising to US$84/bbl. The measures announced on Friday have not calmed the markets given the overhang: renewed fighting between Iran and Israel meant the USDINR reversed the entire gain: USDINR was 95.7 before the Governor’s statement, closed below 95 on Friday and but closed today at 95.7. A self-reinforcing cycle of INR weakness causing more real-economy participants to position for a weaker INR out of fear. With India’s net international investment position relatively stable, and external debt to GDP well below peak, the country has the balance sheet to borrow dollars, like attempted by recent measures, and cushion against this panic.
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