India BoP risk: Kotak sees FY2027 CAD strain, inflows slide

Why Kotak is flagging external vulnerability now

India’s growing dependence on external capital is emerging as a key macro vulnerability, according to a report by Kotak Institutional Equities. The brokerage said the risk has become clearer over the past two years as foreign investment flows weakened while the current account deficit (CAD) stayed under pressure. Kotak linked the CAD stress largely to elevated global energy prices. In its assessment, strong capital inflows until FY2024 helped offset India’s structural trade and current account deficits. But the recent decline in foreign capital inflows has reduced that buffer, raising concerns around the balance of payments (BoP). The report also highlighted that the rising cost of servicing India’s growing stock of external capital is adding to the strain on the CAD and the BoP.

A two-year shift in the external financing equation

Kotak described a sharp deterioration in capital account flows in recent years. The brokerage’s central point is that India’s external capital dependency has become more visible as two trends coincided. First, net foreign direct investment (FDI) inflows slowed sharply. Second, foreign portfolio investor (FPI) flows turned weaker, with outflows increasing. This combination, alongside a higher CAD driven by energy prices, makes the external financing position more sensitive to changes in global risk appetite and commodity prices. Kotak’s report suggests that the vulnerability could persist without a structural fix to the high CAD.

Capital inflows fell sharply after FY2024

One of the clearest signals highlighted by the report is the scale of the slowdown in annual capital inflows. Kotak said annual capital inflows averaged around USD 73 billion during FY2019-24. That figure declined sharply to USD 17 billion in FY2025. The brokerage further expects flows to turn negative at around USD 5 billion in FY2026. This matters because the earlier period of large capital surpluses helped sustain the BoP even with high structural trade and current account deficits. With that cushion thinning, the external position becomes more exposed to adverse shocks.

Net FDI weakened to a trickle in FY2025

Kotak said net FDI inflows have weakened significantly compared with the recent past. The report stated that annual net FDI inflows fell from USD 37 billion during FY2019-23 to just USD 1 billion in FY2025. While gross FDI inflows into India have remained relatively stable, Kotak argued the net outcome looks weaker because of sizeable exits and repatriation. The brokerage pointed to large exits from private equity (PE) and venture capital (VC) investors, as well as stake sales by multinational companies (MNCs) in their Indian subsidiaries through offers for sale in both primary and secondary markets. In effect, the report suggests that stable gross inflows can be neutralised by a high pace of outflows.

FPI flows expected to stay muted as EM relative appeal weakens

On portfolio flows, Kotak expects subdued FPI flows into India in the near term. The report attributes this to weakening relative attractiveness versus other emerging markets, alongside rising current account pressures and a weaker earnings outlook. It also reiterates that the recent period has seen large FPI outflows, which has reduced the capital account buffer available to finance structural trade deficits. The core message is not that India has no access to external capital, but that the mix and strength of flows look less supportive than they did up to FY2024.

CAD pressure remains tied to crude and energy prices

Kotak warned that India’s CAD could widen further due to elevated crude oil prices, putting added pressure on the BoP. The brokerage explicitly flagged FY2027 as a year where the situation could worsen further if crude prices remain elevated. In Kotak’s framing, energy-driven import costs can raise the CAD at the same time that capital inflows are not strong enough to provide a reliable offset. This interaction between commodity prices and capital flows is central to the report’s concern about external vulnerability.

PE and VC exits are a meaningful channel of outflows

A notable part of the report is its focus on PE and VC exits as a driver of net outflows. Kotak expects these exits to remain high, citing substantial holdings that these investors continue to have in large listed and unlisted Indian companies. The brokerage estimated that PE and VC investors currently hold around USD 32 billion worth of stakes in large listed Indian firms at current valuations. Kotak also said exposure in unlisted companies is even larger, though it did not quantify that number in the report extract. Alongside exits, Kotak highlighted MNC stake sales in Indian subsidiaries as another route for outflows through primary and secondary market transactions.

Servicing costs on external capital are rising

Beyond the flow picture, Kotak flagged the growing cost of servicing India’s expanding stock of external capital. The report said this servicing burden has added to the CAD and BoP challenges. In practical terms, this suggests that even if the CAD is driven by trade and energy prices, the income outflow component linked to external liabilities can also become a larger factor over time. Kotak’s emphasis here is that financing is not costless, and a higher reliance on external capital can raise recurring outflows.

Market context: equity outflows, debt inflows, and rupee pressure

The broader balance of payments picture has also turned “more negative” in recent commentary included in the provided material. Equity outflows “this year” were described as substantial at around USD 23.2 billion so far. The same commentary noted that inflows on the debt side, particularly through FAR bonds, have not been enough to compensate for equity outflows. It also referenced IPO-related outflows and private equity deals where foreign investors cashed out and took money overseas. Put together, these factors were linked to an intensification of pressure on the rupee compared with even a few months earlier.

Key numbers from the Kotak report and related commentary

Why the warning matters for investors and policymakers

For equity and debt investors, the report’s message is that macro stability can become more sensitive when both the CAD and capital flows move in an unfavourable direction at the same time. For policymakers, Kotak’s emphasis on a “structural fix” to a high CAD suggests that cyclical inflows may not be enough to keep the BoP comfortable if outflows rise and servicing costs increase. The report also frames crude oil prices as a key swing factor, particularly into FY2027, because energy imports can quickly widen the CAD. And when portfolio flows remain muted, the adjustment burden can shift to the currency, reserves, or domestic financial conditions.

Conclusion

Kotak Institutional Equities sees India’s external capital dependence as a growing vulnerability, driven by weaker net FDI, subdued FPI flows, and CAD pressure linked to high energy prices. The brokerage warns that if crude remains elevated, FY2027 could see added stress on the CAD and the overall BoP. The report also points to PE/VC exits and MNC stake sales as key channels that can offset stable gross FDI inflows. Investors will likely track crude prices, the direction of foreign flows, and signs of improvement in India’s relative earnings outlook, all of which Kotak links to the durability of external financing buffers.