India’s Balance of Payments Moves Into Deficit in Q1 FY27 as Capital Outflows Rise

India’s external payments position weakened during the first quarter of fiscal year 2026-27, with the country recording a balance of payments (BoP) deficit of $8.1 billion. The latest figures mark a sharp reversal from the $4.5 billion surplus recorded during the corresponding quarter a year earlier, highlighting the impact of weaker capital flows and a larger merchandise trade gap.

Data released by the Reserve Bank of India showed that the deterioration was driven mainly by developments in the capital account. Foreign portfolio investors pulled money out of Indian financial markets during the quarter, creating substantial dollar outflows at a time when global investors were adopting a more cautious approach amid geopolitical uncertainty.

Capital Account Turns Negative

The capital account registered a deficit of $5 billion in Q1 FY27, compared with a surplus of $7.4 billion in the same quarter of the previous year. The reversal was significant enough to outweigh improvements recorded in several other components of India’s external sector.

Foreign portfolio investor activity was a major factor behind the shift. Overseas investors recorded a net outflow of $9.6 billion from Indian markets during the quarter. The withdrawal came against a backdrop of heightened geopolitical risks and a broader risk-off environment in global financial markets.

At the same time, foreign direct investment provided some support. Net FDI increased to $7.8 billion during the quarter, compared with $4.8 billion a year earlier. However, the improvement in direct investment was not sufficient to compensate for the portfolio-related outflows and the overall deterioration in the capital account.

Trade Deficit Expands

India’s current account also remained under pressure. The current account deficit widened modestly to $3.1 billion in the April-June quarter from $2.9 billion in the year-earlier period. A larger merchandise trade deficit was an important reason behind the deterioration.

The merchandise trade gap increased to $85.7 billion from $68.9 billion a year earlier. The expansion was largely associated with a higher fuel import bill, underscoring the continued sensitivity of India’s external accounts to movements in energy costs.

Crude oil imports became particularly expensive during the quarter. India’s crude oil import bill rose 26% year-on-year to $49 billion, even though the volume of crude imported declined by 18%. The disruption in supplies through the Strait of Hormuz contributed to the decline in import volumes while increasing pressure on the overall fuel bill.

India remains heavily dependent on imported crude to meet domestic energy requirements. The country sources more than 90% of its fuel consumption from overseas shipments, making international oil prices and supply disruptions important variables for its trade balance and external stability.

Services and Remittances Provide Support

Not all components of the external account weakened. India continued to receive strong support from its services exports and transfers from overseas.

The net services surplus rose to $52.2 billion in the first quarter, compared with $47.9 billion during the same period last year. This increase helped cushion some of the pressure created by the merchandise trade deficit.

Transfers from abroad also increased. Net transfers, which include items such as remittances, foreign assistance, pensions and gifts, reached $41.4 billion, up from $30.9 billion a year earlier. The stronger inflow provided another important source of foreign exchange for the economy.

However, the gains from services and transfers were not large enough to completely offset the combination of the higher merchandise trade deficit and capital outflows.

What the Numbers Mean for India

The Q1 figures show that India’s external position is being influenced by two different forces. On one side, the country continues to benefit from robust services earnings, sizeable remittance inflows and stronger direct investment. On the other, its dependence on imported energy and sensitivity to global portfolio flows remain important vulnerabilities.

The sharp change in the overall BoP balance from a surplus to a deficit also illustrates how quickly external accounts can respond when financial market conditions change. A sizeable withdrawal by foreign portfolio investors can create significant pressure even when other parts of the external sector remain relatively resilient.

For policymakers and investors, the coming quarters will therefore be important to watch. Trends in crude oil prices, geopolitical developments, foreign portfolio investment and direct investment flows are likely to remain key factors influencing India’s external balance.

The latest numbers do not indicate a broad-based deterioration across every component. Instead, they reflect the combined effect of a larger trade gap and a substantial reversal in capital flows, partly offset by strong services earnings, remittances and FDI. How these factors evolve through the rest of FY27 will determine whether the first-quarter deficit proves temporary or develops into a more persistent pressure on India’s balance of payments.