Economy Macro-Cap : FY27 BoP outlook improves further by Motilal Oswal Financial Services Ltd
* BoP overview: The sharp pickup in capital inflows due to the RBI’s FCNR(B) scheme has sharply improved the Balance of Payments (BoP) outlook, despite the oil prices continuing to trade above USD90pb over the last two weeks. The BoP balance has improved to USD79b (1.9% of GDP) vs. prior expectations of USD45b (1.1% of GDP).
* Capital account: The FCNR(B) scheme, which opened on 8th Jun’26, garnered USD127b, while ECBs and OFCBs garnered USD3.89b and USD5.26b, respectively, as of 31st Aug’26. This has substantially improved India’s external sector outlook. Net FDI inflows in 1QFY27 stood at USD6.1b vs. the FY26 print of USD6.7b. With an assumption of a modest dip in net foreign portfolio inflows for FY27, overall capital account is likely to post a surplus of USD135b (3.3% of GDP) in FY27 vs. our earlier expectation of USD45b (1.1% of GDP) and (-)USD24b (-0.6% of GDP) in FY26.
* Current account: The surprise is also evident in the current account, with merchandise goods exports, both oil and non-oil, holding up strongly despite geopolitical uncertainties. Diversification of export markets and broadening of product groups are supportive of this improvement. The net services surplus and remittances also continue to remain strong despite the Middle East concerns. The only key monitorable remains oil prices. Global Brent prices in 1HFY27 have averaged USD96pb. We assume USD85pb for H2FY27. Our CAD/GDP estimate improves to 1.4% (-USD56b) with oil prices at USD90pb as against our earlier forecast of 1.5% (-USD60b) with oil prices at USD85pb.
* If oil prices continue to trade above USD90pb for a major part of 2HFY27, our CAD/GDP estimate would moderate to 1.7% (-USD71b), primarily on account of a higher oil import bill. Capital inflows would also moderate due to much lower net foreign portfolio inflows. This would result in a capital account balance of USD125b (3.1% of GDP) and consequently, a BoP balance of USD54b or 1.3% of GDP. The estimates, nevertheless, suggest that even with the shock from higher oil prices, capital and BoP balances remain better than in FY26. Capital account balance was a meagre USD6b, while the BoP balance was (-) USD24b in FY26. The key shock absorber this year has been the policy-led FCNR (B) inflows. The current account balance has worsened from the FY26 print of 0.7% of GDP due to higher oil prices, but it remains well within manageable limits.
* Rupee outlook: The external environment has turned less favorable in recent sessions, with Brent crude rising ~7% this week to USD95.5/bbl, while the 10- year US Treasury yield has risen to its highest level in nearly three years and the dollar index is approaching 100. Despite these headwinds, the rupee has remained resilient, with the currency trading around INR94.9–95/USD, supported by higher-than-expected FCNR (B) inflows. That said, with oil prices still elevated and a sharp rise in global yields driving risk aversion, the extent of further appreciation is likely to remain capped, and any gains could prove shortlived. We retain our FY27 USDINR forecast at 95.
1QFY27 CAD remain within comfortable limits
* India’s current account remained comfortable in 1QFY27, despite the widening merchandise trade deficit. The current account deficit stood at USD4.2b (0.5% of GDP) in 1QFY27, compared with a USD7.1b surplus (+0.6% of GDP) in 4QFY26 and a USD3.4b deficit (0.4% of GDP) in 1QFY26. The sequential deterioration was largely driven by the wider merchandise deficit, while resilient services exports and remittance inflows provided some cushion. The core current account balance (4% of GDP), ex. oil and gold, continued to remain in surplus in 1QFY27.
* Merchandise trade deficit widened sharply: The merchandise trade deficit increased to USD86.1b in 1QFY27 (9.9% of GDP) from USD83.4b (9.9% of GDP) in 4QFY26 and USD68.9b (8.2% of GDP) in 1QFY26, making goods trade the biggest source of pressure on the current account. Merchandise exports stood at USD132.0b in 1QFY27, while imports rose to USD218.0b. The deterioration was partly driven by petroleum trade, with the POL deficit increasing to USD37.6b in 1QFY27 from USD32.2b in 1QFY26.
* Services surplus remains a key structural cushion: The services account continued to provide a substantial offset to the merchandise deficit in 1QFY27. Net services receipts stood at USD51.6b in 1QFY27 (5.5% of GDP), compared with USD60.4b in 4QFY26 (5.8% of GDP) and USD47.9b (5.1% of GDP) in 1QFY26. While receipts moderated sequentially from the March quarter, they remained significantly higher than a year ago. Services exports were supported by computer services, other business services, and transportation services.
* Remittances remain a strong external-sector buffer: Personal transfer receipts remained robust at USD42.9b in 1QFY27, compared with USD43.5b in 4QFY26 and USD33.2b in 1QFY26. Although remittances moderated marginally on a sequential basis, they remained substantially higher than a year ago levels and continued to provide a strong cushion to the current account.
* FDI improved, but FPI remained a drag: The financial account remained mixed in 1QFY27, with stronger FDI partly offset by continued portfolio outflows. Net FDI inflows increased to USD6.1b in 1QFY27 from USD4.2b in 4QFY26 and USD5.2b in 1QFY26. However, FPI recorded a net outflow of USD9.6b in 1QFY27, albeit lower than the USD12.0b outflow in 4QFY26, compared with an inflow of USD1.6b in 1QFY26.
* Overall BoP moved into deficit: India's overall BoP recorded a USD8.1b (0.9% of GDP) deficit in 1QFY27, compared with a USD7.2b surplus in 4QFY26 and a USD4.5b surplus in 1QFY26 (+0.5% of GDP). The move into deficit reflected the combination of the current account deficit and weaker net capital flows, particularly FPI outflows.
Detailed highlights
CAD shifts from surplus to deficit as trade pressures intensify
India’s external position weakened sequentially in 1QFY27, with the current account moving into a USD4.2b deficit (0.5% of GDP) in 1QFY27, compared with a USD7.1b surplus (0.7% of GDP) in 4QFY26. The deterioration was primarily driven by the higher merchandise trade deficit, although stronger service receipts and remittances continued to provide a substantial cushion.
Merchandise deficit remains the biggest source of pressure
The merchandise trade deficit widened to USD86.1b in 1QFY27 from USD83.4b in 4QFY26, and was substantially higher than the USD68.9b recorded in 1QFY26. Merchandise exports stood at USD132.0b in 1QFY27, while imports increased sharply to USD218.0b. The deterioration was partly driven by petroleum trade, with the POL deficit rising to USD37.6b in 1QFY27 from USD32.2b in 1QFY26. The sequential increase in the merchandise deficit suggests that goods trade remains the key vulnerability in India’s external account, particularly given the elevated and volatile crude prices.
Services surplus remains a strong structural buffer
The services account continued to provide a significant offset to the merchandise deficit. Net services receipts stood at USD51.6b in 1QFY27, compared with USD60.4b in 4QFY26 and USD47.9b in 1QFY26. The sequential moderation from 4QFY26 reflects the normal quarter-to-quarter movement in services receipts, but the surplus remained substantially higher than a year earlier. Services exports continued to benefit from computer services, other business services, and transportation services. The resilience of the services surplus remains critical in preventing the much larger merchandise deficit from translating into a significantly wider CAD
Rupee outlook: RBI intervention cushions the impact of higher crude and US yields
The external environment has turned less favorable in recent sessions, with Brent crude rising ~7% this week to USD95.5/bbl, while the 10-year US Treasury yield has risen to its highest level in nearly three years and the dollar index is approaching 100. Despite these headwinds, the rupee has remained resilient, with the currency trading around INR94.9-95/USD supported by the higher-than-expected FCNR (B) inflows. That said, with oil prices still elevated and a sharp rise in global yields driving risk aversion, the extent of appreciation is likely to be capped, and any gains could prove short-lived. The RBI has reportedly stepped-up intervention over the past three days, leveraging its sizeable FX buffer to insulate the rupee from the oil shock. The FX reserves at a record USD740b.
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