ET Graphics: BoP stability tested by outflows & Rupee fall
India's external accounts faced simultaneous stress in FY2025-26: a widening current account deficit (CAD), net foreign portfolio investor (FPI) outflows, and significant rupee depreciation.
The CAD stood at $13.2 billion (1.3% of GDP) in Q3 FY2025-26, compared with $11.3 billion (1.1% of GDP) in the corresponding quarter of the previous year.
Net FPI outflows in Q3 FY26 amounted to $11.4 billion, a major driver of capital account pressure.
The rupee depreciated approximately 1.6%, moving from 83.2/USD (Q3 FY25) to 84.5/USD (Q3 FY26) within-quarter, with further weakening in subsequent months.
Inflows into NRI deposits fell: total NRI deposit inflows were $14.41 billion in FY26, down from $16.16 billion in FY25; FCNR(B) inflows collapsed to $946 million in FY26 from $7.08 billion in FY25.
Policy responses under consideration include incentivising foreign deposits, liberalising capital inflows, and the possibility of state-owned banks issuing foreign currency bonds.
Balance of Payments (BoP): Structure and Components
The Balance of Payments is a systematic record of all economic transactions between residents of a country and the rest of the world during a given period (typically a quarter or year). India's BoP is compiled and published quarterly by the Reserve Bank of India. The BoP has two main accounts:
Current Account — records: - Merchandise trade (goods exports and imports) - Invisibles: Services (IT, travel, transport), Income (interest, dividends), and Transfers (remittances, grants) - India typically runs a goods deficit offset partly by a services surplus and large remittance inflows.
Capital Account (Financial Account in IMF terminology) — records: - Foreign Direct Investment (FDI) — inflows and outflows - Foreign Portfolio Investment (FPI) — equity and debt - External Commercial Borrowings (ECBs) - NRI deposits (FCNR(B), NRE, NRO) - RBI's foreign exchange reserves changes
Under the double-entry accounting identity: Current Account + Capital Account + Changes in Reserves = 0. A CAD must be financed by a capital account surplus (net inflows) or a drawdown of forex reserves.
Key Details
- RBI publishes BoP data: quarterly, with a lag of one quarter.
- India's CAD in Q3 FY26: $13.2 billion (1.3% of GDP).
- India's CAD full-year FY26 projection: approximately 1.3% of GDP (vs. ~1% in FY25).
- The "safe zone" for India's CAD is generally considered to be below 2.5–3% of GDP (beyond which financing becomes stressed).
A widening CAD combined with FPI outflows creates a twin deficit in the BoP — both the current and capital accounts are under simultaneous pressure — forcing the RBI to intervene through reserves and consider structural measures to attract stable long-term capital.
NRI Deposits: FCNR(B), NRE, and NRO Accounts as Capital Account Instruments
NRI deposits are a key component of the capital account and serve as a stable source of foreign exchange financing for India's CAD. There are three main types:
FCNR(B) — Foreign Currency Non-Resident (Banks): - Introduced by the RBI on May 15, 1993 (replacing FCNR-A). - Fixed deposits held in foreign currencies: USD, GBP, EUR, AUD, CAD, JPY. - The bank bears the exchange rate risk (unlike FCNR-A, where the RBI bore it). - Interest earned is fully tax-exempt in India; principal and interest are fully repatriable under FEMA. - Tenure: 1 to 5 years. Interest rates capped by RBI at specified maximums. - Used as a forex stabilisation instrument: in 2013, during the "taper tantrum" rupee crisis, the RBI offered a special FCNR(B) swap window at a concessional rate, attracting ~$34 billion in deposits that stabilised the rupee.
NRE (Non-Resident External) accounts: maintained in Indian rupees; interest is tax-free in India; fully repatriable. Inflows in Apr–Dec 2025: $5.06 billion (up from $3.57 billion).
NRO (Non-Resident Ordinary) accounts: maintained in Indian rupees; earnings from Indian sources; repatriation limited to $1 million/year; taxable. Inflows in Apr–Dec 2025: $4.10 billion (up from $3.29 billion).
Key Details
- FCNR(B) inflows FY26: $946 million (down from $7.08 billion in FY25) — a collapse of ~87%.
- Total NRI deposit inflows FY26: $14.41 billion (down from $16.16 billion in FY25).
- FCNR(B) decline in Apr–Nov 2025: $1.86 billion (down from $6.31 billion in same period FY25).
- Shift in NRI preference: away from FCNR(B) (forex-denominated, rate-sensitive) toward NRE/NRO (rupee-denominated, stable local rates).
The sharp FCNR(B) decline reduces a traditional buffer for BoP stabilisation. Policy discussions about incentivising FCNR(B) through higher rate ceilings or a swap facility mirror the 2013 playbook — when such measures successfully reversed a BoP crisis.
Exchange Rate Management and RBI Tools
The RBI manages the rupee through a managed float regime — it intervenes in foreign exchange markets to prevent excessive volatility, without committing to a fixed exchange rate. Key tools include: - Forex market intervention: RBI sells USD from reserves to absorb excess demand and support the rupee. - Repo rate changes (indirect): higher rates attract capital inflows, supporting the currency. - Reserve requirements and swap windows: special FCNR(B) or NRI deposit schemes with concessional forward-cover costs encourage stable inflows. - ECB liberalisation: relaxing external commercial borrowing limits enables corporates to raise forex debt. - Sovereign/PSU foreign currency bonds: state-owned banks or the Government issuing bonds in international markets to directly raise forex.
Key Details
- India's forex reserves (peak): ~$704 billion (September 2024); fell to ~$635–640 billion range in early 2026 due to intervention.
- RBI intervention approach: targets exchange rate volatility, not a specific exchange rate level.
- Rupee depreciation Q3 FY26: from 83.2/USD to 84.5/USD (~1.6% within-quarter depreciation).
- FPI net outflow Q3 FY26: $11.4 billion — primary near-term driver of capital pressure.
The combination of widening CAD and FPI outflows represents the same structural stress India experienced in 2013 and 2018. The menu of policy options being discussed — FCNR incentives, capital account liberalisation, PSU foreign currency bond issuance — are all time-tested RBI/MoF responses to BoP stress.
- India CAD Q3 FY26: $13.2 billion (1.3% of GDP); Q3 FY25: $11.3 billion (1.1% of GDP).
- Full-year CAD FY26 projection: ~1.3% of GDP (vs. ~1% in FY25); "safe zone" is below ~2.5–3% of GDP.
- FPI net outflow Q3 FY26: $11.4 billion.
- Rupee depreciation Q3 FY26: ~84.5/USD from 83.2/USD (1.6% depreciation within-quarter).
- NRI deposit inflows FY26: $14.41 billion (down from $16.16 billion in FY25).
- FCNR(B) inflows FY26: $946 million (down ~87% from $7.08 billion in FY25).
- FCNR(B) introduced: May 15, 1993; denominated in 6 currencies: USD, GBP, EUR, AUD, CAD, JPY.
- 2013 RBI FCNR(B) special window: raised ~$34 billion, stabilising the rupee during taper tantrum.
- NRE account inflows Apr–Dec 2025: $5.06 billion (up from $3.57 billion).
- NRO repatriation limit: $1 million per financial year.
- Trade deficit FY26: ~$119.30 billion (widened from ~$94.66 billion in FY25).
- BoP compiled by: Reserve Bank of India (quarterly).