India’s external sector presents a mixed picture, combining the comfort of record-high foreign exchange reserves with emerging stress in capital flows, as highlighted in the Reserve Bank of India’s March bulletin and market reactions. 

Forex reserves remain a strong buffer, hovering near $709.8 billion in February 2026, with import cover at about 11.2 months. This provides significant insulation against any immediate balance of payments concerns, even as global uncertainties persist. 

However, beneath this stability, capital flows are showing signs of strain. Foreign portfolio investors (FPIs) sharply reversed course in March, recording net outflows of $10.8 billion — the steepest decline in recent months — amid geopolitical tensions and tighter global financial conditions. Earlier in February, FPIs had briefly turned positive with inflows of $3.1 billion, underscoring the volatility. 

Echoing these trends, Trinh Nguyen, Senior Economist for Emerging Asia at Natixis, noted, "India got a lot of reserves so no BOP crisis here. That said, with what the RBI did to stabilize the rupee, odds are foreign investors are going to be shy for for a bit." 

She added, "Foreign investor selling accelerates in March and so we got both FDI and FPI outward. Current account also worsening so balance of payment not favorable for INR." 

Foreign direct investment (FDI) flows also reflect a nuanced trend. While gross inflows remain steady — rising to $79.3 billion during April 2025-January 2026 from $69.2 billion a year earlier — outflows have outpaced inflows in recent months. Net FDI has stayed negative since the second half of 2025, with January 2026 recording a net outflow of $1.3 billion despite $5.7 billion in gross inflows. 

Nguyen flagged this imbalance, saying, "FDI inflows are positive but outflows even bigger (to the US mostly) and so India has had net negative FDI since H2 2025 until now. It should have positive net FDI." 

On the borrowing front, external commercial borrowing (ECB) activity has moderated. Registrations dropped to $32.9 billion during April–January 2026 from $47.3 billion a year ago, while net inflows remained contained at around $15 billion, indicating cautious corporate sentiment. 

Liquidity conditions in the domestic banking system are also under pressure. Credit growth continues to outpace deposit growth, tightening funding conditions. According to Nguyen, "The issue here is that liquidity conditions are not great with credit growth rising but deposits not as much." 

She further noted, "On the investment flow side, portfolio investors are shy and foreign direct investment is negative on a net basis. So this is a drag for the INR vs USD as imports are up but capital flows not favorable." 

Policy actions to stabilise the rupee have also had ripple effects. Measures such as curbs on gold imports and tighter controls on foreign exchange outflows reflect efforts to manage volatility, but may have dampened investor sentiment in the near term. 

Amid these pressures, one structural positive stands out: India’s energy transition. Renewable energy now accounts for 26.4% of total electricity generation as of early 2026, up steadily from around 21% in 2019-20. Solar power alone has seen a sharp rise, contributing 9% of generation, reflecting growing capacity and policy push. 

Nguyen highlighted this as a mitigating factor, stating, "India electricity generation from renewable sources are rising to now 26.4% of total, so that's an offsetting factor for the crisis."

Published on: Apr 17, 2026 4:28 PM IST