Capital Inflows – India’s External Sector Seen Strengthening with Higher FY27 Capital Surplus
Capital Inflows –India’s external sector is expected to remain on a stronger footing in FY27, backed by improving foreign capital inflows, stable export performance, and continued resilience in overseas earnings, according to a report released by Motilal Oswal Financial Services.
Stronger Capital Flows Expected in FY27
The brokerage estimates that India’s capital account surplus could reach nearly USD 105 billion, equivalent to around 2.6 per cent of the country’s GDP in FY27. The upward revision is linked to higher foreign investments, stronger external commercial borrowings (ECBs), fresh inflows through FCNR(B) deposits, improved foreign portfolio investment, and steady foreign direct investment (FDI). These factors are expected to reinforce India’s external financial position despite ongoing global economic uncertainties.
Services Exports Continue to Provide Stability
The report highlighted that India’s services sector remains a key source of strength for the economy. Consistent growth in services exports, along with healthy remittance inflows from overseas Indians, has helped offset pressure created by the country’s merchandise trade deficit.
During the first quarter of FY27, services exports increased by 6.2 per cent year-on-year to USD 103.4 billion, while services imports stood at USD 54.0 billion. This resulted in a services trade surplus of USD 49.4 billion. On a monthly basis, the services trade surplus has remained in the range of USD 16-17 billion, providing a stable buffer for the overall external balance.
Export Growth Remains Encouraging
According to the report, India’s combined exports of goods and services reached USD 232.7 billion during the first quarter of FY27, marking an annual increase of 11.4 per cent. Although merchandise trade is expected to face increasing pressure, continued expansion in service-related exports is likely to support overall export performance.
The brokerage projects that the merchandise trade deficit may widen to approximately USD 406 billion, or 9.9 per cent of GDP, in FY27, compared with USD 337 billion, or 8.6 per cent of GDP, in the previous financial year. Even so, a record services trade surplus of about USD 238 billion, together with net transfer inflows estimated at nearly USD 158 billion, is expected to reduce the overall impact on the country’s external accounts.
Current Account Deficit Likely to Stay Manageable
Despite the projected rise in the merchandise trade deficit, Motilal Oswal Financial Services expects the current account deficit to increase only moderately. The report forecasts the deficit at around USD 60 billion, representing 1.5 per cent of GDP in FY27, compared with USD 25 billion, or 0.6 per cent of GDP, in FY26.
The brokerage believes that the combination of strong services earnings and steady transfer inflows will continue to provide sufficient support to maintain external stability.
Policy Measures May Attract Additional Foreign Investment
The report also pointed to recent initiatives introduced by the Reserve Bank of India and the Government of India that could significantly improve foreign capital inflows. These measures are expected to attract an additional USD 75-80 billion in overseas investments.
In addition, the inclusion of more Indian government securities in global bond indices is projected to generate another USD 15-20 billion through passive investment flows from international investors.
Balance of Payments Outlook Improves
Supported by stronger capital inflows, the projected current account deficit is expected to be fully financed, leading to a balance of payments surplus of around USD 45 billion, or 1.1 per cent of GDP, during FY27. This marks a considerable improvement from the brokerage’s earlier expectation of a USD 7 billion balance of payments deficit, which had been based on a higher crude oil price assumption of USD 95 per barrel.
The report also noted that the India-UK Comprehensive Economic and Trade Agreement (CETA), which came into effect on July 15, 2026, is likely to strengthen India’s external sector over the long term. As India expands its network of free trade agreements with developed and emerging economies, the agreement is expected to improve trade opportunities and support future investment flows.
Overall, the brokerage has revised its outlook upward, now forecasting a capital account surplus of approximately USD 105 billion in FY27, significantly higher than its earlier estimate of around USD 80 billion under the higher oil price scenario.