India external sector 2026: reserves high, flows strain

A record forex buffer, but a changing tone in flows

India’s external sector is sending two signals at once. Foreign exchange reserves remain near record highs, offering comfort on balance of payments risks. But capital flows have turned more volatile, with foreign investors pulling money out as global conditions tighten.

The Reserve Bank of India’s March bulletin and subsequent market commentary highlight this split. The buffer from reserves has not gone away. Yet the pressure points are emerging in portfolio flows, net foreign direct investment, and domestic liquidity.

Forex reserves still provide strong import cover

India’s forex reserves were described as a strong buffer, hovering near $109.8 billion in February 2026. Import cover was cited at about 11.2 months, suggesting the country has a sizeable cushion against near-term external shocks.

Separate RBI data points within the same broader coverage also placed reserves at $123.8 billion as on 30 January 2026, again noting merchandise import cover of more than eleven months. Together, these numbers underline the same message: reserves are comfortable even as other external-sector components weaken.

March 2026: portfolio flows swing sharply negative

The stress is clearer in portfolio flows. Foreign portfolio investors (FPIs) reversed course in March, with net outflows of $10.8 billion, described as the steepest decline in recent months amid geopolitical tensions and tighter global financial conditions.

Another figure in the same set of reports said around $12.5 billion left on the portfolio side in March alone, reinforcing the scale of the risk-off move even if the exact measurement differs across datasets and time cutoffs.

This came after a brief improvement in February, when FPIs had turned positive with $1.1 billion of inflows, underscoring the volatility in foreign allocations.

Net FDI remains subdued despite higher gross inflows

On the FDI side, the picture is nuanced. Gross inflows increased, but net FDI has remained weak due to strong outflows.

Gross FDI inflows rose to $19.3 billion during April 2025 to January 2026, up from $19.2 billion a year earlier. Yet net FDI has stayed negative since the second half of 2025, and January 2026 recorded a net outflow of $1.3 billion despite $1.7 billion in gross inflows.

The RBI review described net FDI as “subdued,” adding that net FDI was $1.7 billion during April to January FY26. It attributed the weak net position to elevated repatriation by foreign investors ($19.5 billion) and outward investment by Indian firms ($18.1 billion).

Repatriation and outward investment: the key drag in net FDI

The December 2025 snapshot shows the same pressure. Net FDI was negative $1.61 billion in December 2025, compared with negative $189 million in December 2024, driven by higher outward remittances by foreign investors and increased overseas investment by Indian firms.

Repatriations in December were cited at $1.45 billion, up from $1.40 billion in December 2024, which pushed net FDI negative even with continued gross inflows.

Over April to November 2025, gross FDI inflows rose 16.1% year on year to $14.7 billion (from $15.8 billion), while net FDI during that period was $1.6 billion (up from $1.8 billion a year earlier). The mix points to a cycle where gross inflows remain meaningful but net numbers depend heavily on repatriation and outward investment.

External commercial borrowing moderates

Borrowing activity has also cooled. External commercial borrowing (ECB) registrations fell to $12.9 billion during April to January 2026, from $17.3 billion a year earlier.

Net inflows were described as contained at around $15 billion, indicating cautious sentiment among corporates on overseas borrowing.

Domestic liquidity: credit-deposit gap adds pressure

Conditions in the domestic banking system are also under strain. Credit growth has continued to outpace deposit growth, tightening funding conditions.

Natixis Senior Economist Trinh Nguyen linked weaker liquidity with the broader external balance. She said portfolio investors are “shy” and net FDI is negative, while imports are up and capital flows are not favourable, adding to pressure on the rupee versus the US dollar.

Rupee pressure: trade costs, oil sensitivity, and risk aversion

The rupee’s weakness has been connected to trade-related pressures and global risk sentiment. Higher global prices and logistics costs have weighed on the currency, which depreciated to ₹93.88 per US dollar as of March 24.

India’s status as a net energy importer was also flagged as a factor, especially during oil shocks. Alongside foreign outflows, these dynamics have added to depreciation pressure.

Policy measures to stabilise the currency

Policy actions to stabilise the rupee have had ripple effects. Measures referenced included curbs on gold imports and tighter controls on foreign exchange outflows.

In market commentary, Nguyen said India has ample reserves and “no BOP crisis,” but added that steps taken to stabilise the rupee could make foreign investors cautious for a period.

Offset factors: renewables and resilient growth projections

Not all signals are negative. Renewable electricity generation was cited as rising to 26.4% of total, described as an offsetting factor.

India’s growth outlook was also presented as resilient. The World Bank projected 6.6% expansion in FY27, and World Bank economist Aurelien Kruse said net FPI outflows in FY26 were largely driven by external factors as global investors recalibrate emerging market allocations.

Key data points at a glance

Why the mix matters for markets

The combination of high reserves and weaker net inflows changes how investors read India’s macro picture. Reserves reduce the probability of an abrupt balance of payments crisis. But portfolio outflows and net FDI weakness can still affect market liquidity, currency stability, and funding costs.

The RBI and external commentators also pointed to the interaction between domestic liquidity and external flows. When credit growth runs ahead of deposit growth, the system’s reliance on stable funding increases, and volatile foreign flows can add to stress.

Conclusion

India enters 2026 with a strong forex buffer and import cover above eleven months, but capital flows are showing clear strain. March’s sharp portfolio outflows, along with subdued net FDI driven by repatriation and outward investment, have added to rupee pressure and tighter liquidity.

Near-term direction will depend on how global risk sentiment evolves and how policy measures to manage currency volatility interact with foreign investor behaviour, alongside the next set of RBI flow and reserve updates.