India’s current account deficit (CAD) is expected to widen in FY27 and capital flows won’t be able to cushion its pressure on balance of payments (BoP) stability, Kotak Institutional Equities noted.
In its earlier report Kotak had pegged FY27 current account deficit at $99.5 billion assuming crude to averages at $95 per barrel, however, the brokerage now notes that the number could rise to $118.7 billion if crude oil prices reach $105 per barrel amid Iran-US war.
The brokerage said, “Large capital inflows until FY2024 offset India’s high structural trade and current account deficits.” Now that capital account cushion is coming under pressure as foreign direct investment (FDI) flows are weakening, and private equity (PE) and venture capital (VC) exits are rising.
PE/VC exits and MNC stake sales weaken India’s FDI balance
Kotak highlighted that FDI inflows into India have remained stable, but they have been offset by large exits from private equity (PV) and venture capital (VC) investors, as well as stake sales by multinational companies in their Indian subsidiaries. Some of the largest outward investors included Tata Motors, Tata Communications, Tata Consultancy Services, Bharti Airtel and InterGlobe Aviation.
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The brokerage said PE and VC investors continue to hold large stakes in several listed and unlisted Indian companies, which could lead to further selling. Companies with significant PE/VC ownership include Lenskart, Swiggy, PB Fintech and Ola Electric Mobility.
PE/VC selling through block deals in NSE-500 companies increased from $2.4 billion in 2019 to $10.4 billion in 2023 and $9.5 billion in 2024, the report noted.
India’s net capital inflows may turn negative in FY26: Kotak
Kotak highlighted that the weakness in FDI flows is mainly due to a sharp rise in money flowing out of India by both foreign and Indian companies. Outflows by foreign entities increased to $45 billion in the 9MFY26 from $27 billion in FY21, while outflows by Indian entities rose to $28 billion from $15 billion during the same period.
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Annual capital inflows into India averaged around $73 billion during FY2019-24. However, the figure fell sharply to $17 billion in FY25 and may turn negative at (-)$5 billion in FY26.
India may lag peers in attracting FPI flows: Kotak
Kotak expects foreign portfolio investment flows into India to remain muted because other emerging markets currently offer better opportunities in areas such as artificial intelligence (AI), semiconductors and commodities.
The brokerage added that India has relatively lower exposure to the AI and semiconductor cycle and remains negatively exposed to commodities such as crude and natural gas, which is benefitting other markets amid disruption of Strait of Hormuz.
Conclusion
Kotak warned that India may face a prolonged external sector challenge as the twin pressures of widening CAD and weakening foreign capital inflows reduce the buffers that had supported the balance of payments in previous years.
Kotak said the continued outflows reflect weakening relative returns and lower earnings growth expectations for Indian equities compared to other emerging markets. It expects Nifty earnings growth at 19.6%.
Whereas, in terms of India’s economy front Kotak has projected FY27 real GDP growth at 6% and average CPI inflation at 5%.
TOPICSCurrent Account DeficitECONOMYThis article was first uploaded on May twenty-seven, twenty twenty-six, at fifty-eight minutes past ten in the morning.