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Stable CAD, improving flows: Is a growth-led turnaround near?
Q1FY27 BoP trends indicate external stability, with a strong invisibles surplus ($81bn) offsetting much of the goods deficit ($86 Bn) and keeping the CAD steady at 0.5% of GDP. Gross FDI remains strong at $100 Bn on a trailing 12M basis, although net FDI recovery has been modest due to continued repatriation and outbound investment. Recovery in portfolio flows is more durable, with MoM improvements sustained beyond Q1; RBI measures to attract dollar funding have also supported inflows. We estimate a negative basic balance and a dollar funding gap (~$20 bn) to continue to exert pressure on the INR, but strong GDP prints could help catalyze a more durable recovery in capital flows.
Q1FY27 CAD at 0.5% of GDP remained supported by a stable services surplus
India’s Q1FY27 CAD at 0.5% of GDP was in line with structural trends: a US$ 51 Bn services surplus and steady net inflows from remittances/transfers ($30 Bn) helped offset the $86 Bn goods deficit. CAD pressures remain manageable as oil and gold deficit is contained by lower imported volumes and YoY growth in net exports of software/business services (together annualizing to $260 Bn) remains strong at 10%/17%. Travel and transport services remain a net drag on the overall services surplus. Any slippage from the resumption of the West Asia conflict or higher gold prices appears limited for now.
Gross FDI stable at ~$100 Bn; portfolio flows improved durably MoM
In Q1FY27, the $1.6 Bn QoQ increase in net FDI was due to higher gross inflows in Apil (one-off?), matched by a pickup in repatriation and ODI: on a trailing 12-month basis, gross FDI has stabilized at a strong ~$100 Bn and net FDI is recovering from a low base. The improvement in portfolio flows seems more durable though. For Q1FY27, the aggregate flows masked the MoM improvements through June, which have since sustained. The $73 bn of FCNR/OFCB/ECB inflows mobilized under the RBI’s concessional swap facility since June also helped meaningfully.
Pressures on INR persist; strong growth could attract durable capital flows
At current rate, CAD is unlikely to breach 1.4% of GDP, though stable flows only cover part of the deficit. On a rolling 4Q basis, the basic balance (BoP ex FPI, interest income, and forwards) is still running negative. While a recovery in portfolio flows is visible, adjusting for RBI interventions, we estimate a full year gap of ~$20 Bn, likely to continue exerting downward pressure on the currency (base case). There are two possible offsets: (i) India’s strong GDP performance in Q1 has pushed up nominal growth forecasts (Axis: 12% for FY27) which will lead to upward earnings revisions for stocks; (ii) India’s recent trade deals and diplomatic outreach could unlock fresh investment opportunities for greenfield projects. Both are credible catalysts to attract more durable capital flows.
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