Following two consecutive quarters of deficit, India’s Net Balance of Payments posted a surplus of 0.7% of GDP (USD 7.2 bn) in Q4 FY26—the highest in FY26, albeit lower than the 0.9% of GDP (USD 8.8 bn) surplus recorded in Q4 FY25.

• The improvement was primarily underpinned by the current account reverting to surplus, at 0.7% of GDP (USD 7.0 bn) in Q4 FY26, after being in deficit for three quarters. 
• The narrowing of the capital account deficit to -0.1% of GDP (USD -1.1 bn) from -0.6% of GDP (USD -5.6 bn) in Q4 FY25 lent support. 

On a cumulative basis, India’s BoP recorded a historic deficit at -0.6% of GDP in FY26, compared with -0.1% of GDP in FY25.

Key highlights: Current Account 

Focussing on key drivers of the improvement in India’s Q4 FY26 current account balance, we note:  

• Merchandise trade deficit narrowed on a sequential basis to USD 83.4 bn in Q4 FY26 from upwardly revised deficit of USD 95.9 bn in Q3 FY26. This was reflected in a decline in imports to GDP ratio to 19.0% from 20.3% in Q3 FY26, even as exports to GDP ratio remained unchanged.  
• Meanwhile surplus in invisibles reached an all-time quarterly high of USD 90.5 bn (8.7% of GDP). This was reflected in record high net services receipts (at USD 60.4 bn; 5.8% of GDP) as well as remittances (USD 41.2 bn; 4.0% of GDP).
• Growth in inward private remittances remained robust at +30.5% YoY in Q4 FY26, suggesting front-loading ahead of the Middle East conflict.
• Outflows under the income balance moderated a tad to 1.1% of GDP.  

On a cumulative basis, India’s current account remained unchanged at 0.6% of GDP vis-à-vis FY25. 

• However, annual merchandise trade deficit widened to a 13-year high of 8.6% of GDP in FY26 from 7.6% in FY25, as import growth (+7.5%) significantly outpaced the modest increase in exports (+0.9%). Even so, resilience in exports reflected likely gains from geographical diversification and considerable front-loading in H1 FY26 notwithstanding an exceptionally challenging tariff environment that persisted until mid-Feb-26
• Meanwhile, trade surplus in invisibles (8% of GDP) led by services, continued to provide stability to India’s current account in FY26. 
• The FY27 Union Budget has further reinforced India’s structural advantage as a global services hub by providing long-awaited tax certainty to technology firms and Global Capability Centres, including the consolidation of IT/ITES under a unified framework with a higher safe harbour threshold and extended tax incentives for overseas cloud service providers. 

Key highlights: Capital Account 

The narrowing of the capital deficit reflected pronounced shifts across its constituent components.

• Foreign investment outflows rose to a 5-quarter high of USD 7.8 bn in Q4 FY26 from USD 3.8 bn in Q3, driven entirely by net FPI outflows, which surged to a 15-quarter high of USD 12.0 bn from USD 0.2 bn in Q3 FY26. 
• This was solely on account of equity asset sales even as debt investments remained modestly positive, largely reflecting global risk aversion amid elevated geopolitical uncertainty. 
• While the return of net FDI to inflows of USD 4.2 bn in Q4 FY26 (from outflows of USD 3.7 bn in Q3) was somewhat comforting, it was more than offset by the quantum of portfolio outflows.
• Meanwhile, compression in the capital account deficit was aided by a six-quarter high of USD 5.4 bn (vs. USD 0.7 bn in Q3 FY26) in Banking Capital, complemented by a sharp recovery in Other capital flows to a surplus of USD 0.7 bn, from a 70-quarter low of USD -20.3 bn in the preceding quarter.

On a cumulative basis, India’s capital account position weakened to near balance (0.0% of GDP) in FY26 from a surplus of 0.4% of GDP in FY25, as surpluses in Loans and Banking capital were largely offset by deficits in net foreign investment and Other capital flows.

Outlook 

While Q4 FY26 started with trade optimism over the conclusion of the India-EU Trade deal and the lowering of exceptionally high US tariffs (on India), the US/Israel-Iran war in quick succession has since kept India’s external sector on the edge. The respite afforded by the fragile ceasefire has likewise proved fleeting, giving way to a renewed phase of escalation, even as diplomatic efforts led by the US continue to simmer in the background.

• With the Strait of Hormuz continuing to be in abeyance, the energy crisis has now entered its fourth month. The Indian Crude Basket (ICB) has remained above USD 100 pb throughout Mar–May-26, averaging nearly USD 111 pb over the period. This along with the increase in broader input basket could put pressure on India’s import bill and CAD in the coming months. 
• In addition, continued depreciating pressure on the INR (by 5% over Mar-May-26) could exacerbate capital flight, even as competitiveness gains for exports remain limited. Having said, recent combination of structural and temporary measures by the RBI to attract foreign capital, should augur well for India’s BoP outlook. 
• The RBI’s near-term measures are expected to incentivise inflows into FCNR(B) deposits and external commercial borrowings (ECBs), with estimates of a potential mobilisation of up to USD 50 bn over the next 1-2 quarters.
• Beyond this, measures aimed at broadening access to the G-sec market, deepening investor participation and leveraging recently announced tax incentives should support a gradual revival in portfolio debt inflows and enhance the likelihood of another bond index inclusion later this year. 
• Meanwhile, government measures of a hike in import duty on gold and silver from 6% to 15% together with quantity caps on duty-free gold imports could aid in curtailing discretionary demand and ease pressure on the current account.
• Notably, exports to GCC nations which accounted for 13% in FY26 fell by 44% during Mar-Apr-26. In addition, under a protracted conflict, remittance inflows to India from the Gulf (~38%) could come under significant pressure. 
• With the prospect of fresh US tariffs of ~12.5% on nearly 60 trading partners adding to export headwinds, the imminent India-US trade agreement, together with the likely operationalisation of recently concluded FTAs could provide a crucial buffer to India's export sector.

Under an average crude price assumption of USD 95 pb in FY27, (from USD 70 pb in FY26), we estimate India’s current account deficit to widen to 1.8% of GDP (USD 75 bn). Nevertheless, the overall BoP balance is likely to remain near balance, as short-term leveraged debt inflows, aided by the RBI’s hedging subsidy (as communicated in the Jun-26 monetary policy review), would help bridge the resulting funding gap.

Tables 1 & 2: Key items within India’s BoP

Note: Figures may not add up due to rounding off and/or past data revisions.

Chart 1: BoP in Q4 FY26 reverted to surplus after two consecutive quarters of deficit