India's capital account flows could rise sharply to around USD 120 billion in FY2027 from just USD 2 billion in FY2026, driven primarily by a strong increase in banking capital and external commercial borrowings (ECBs), according to a strategy report by Kotak Institutional Equities.
In its August 16 report, Kotak estimated that capital account flows could increase dramatically in the coming financial year, providing significant support to India's external position despite expectations of a wider current account deficit.
“We estimate capital account flows to jump sharply from US$2 bn in FY2026 to around US$120 bn in our base case in FY2027,” the report said. Banking capital is expected to account for the largest share of the projected increase. Kotak estimates around USD 80 billion in banking capital flows in FY2027, including approximately USD 70 billion through Foreign Currency Non-Resident Bank (FCNR(B)) deposits.
External commercial borrowings are expected to contribute another USD 20 billion. The report said the sharp rise would be “largely led by (1) US$80 bn in banking capital (US$70 bn in FCNR (B) deposits) and (2) US$20 bn in ECBs.”
The projected improvement in capital flows could play an important role in supporting India's balance of payments (BoP), particularly as the country faces pressure from a potentially wider current account deficit. Kotak expects the stronger capital inflows to more than offset the deterioration in the current account position.
In its base-case scenario, the brokerage estimates that India could record a BoP surplus of around USD 61 billion in FY2027, even as the current account deficit widens.
“India's BoP may be paradoxically quite strong in FY2027, through an improvement in capital flows, that may offset the weak CAD,” the report said.
Kotak estimates India's current account deficit at 1.2 per cent of GDP in FY2027, compared with 0.6 per cent, or around USD 25 billion, in FY2026. The projection is based on an assumption of an average crude oil price of USD 85 per barrel.
Higher crude oil prices remain an important risk to India's external balances because the country relies heavily on imports to meet its energy requirements. A wider current account deficit could increase pressure on the external sector, making stronger capital flows particularly important for maintaining overall balance of payments stability.
However, Kotak does not expect all sources of foreign capital to strengthen equally. Net foreign direct investment (FDI) flows could remain subdued, partly because of elevated private equity and venture capital outflows and continued overseas investment by Indian companies.
The report noted that net FDI inflows have moderated significantly in recent years as gross outflows have increased. Net FDI inflows fell to USD 6.9 billion in FY2026 from USD 44 billion in FY2021, highlighting the changing composition of India's external capital flows.
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Foreign portfolio investment (FPI) flows are also expected to remain volatile and could depend heavily on the relative risk-reward profile of Indian assets compared with other global markets.
“FPI flows may remain volatile, depending on the relative risk-reward of India versus other markets,” Kotak said.
At the same time, the brokerage observed some improvement in FPI flows into India over the preceding two months. The recovery was led mainly by debt inflows amid expectations of India's inclusion in the Bloomberg Global Aggregate Index, along with moderate equity inflows.
Overall, Kotak's assessment suggests that India's external position could receive substantial support from a revival in capital account flows in FY2027. Stronger banking capital and ECB inflows could help cushion the impact of higher energy import costs and a wider current account deficit.
The outlook, however, will depend on global financial conditions, investor sentiment, crude oil prices and the pace of domestic and overseas investment flows. If the projected capital inflows materialise, they could provide a significant boost to India's balance of payments and strengthen the country's external stability during FY2027.
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