Capital Outflows Cast Shadow On India’s Economic Outlook

India’s external sector remains resilient on the surface, supported by strong foreign exchange reserves of nearly $710 billion, according to the Reserve Bank of India. These reserves provide a solid buffer against any immediate balance of payments crisis, even as global uncertainties persist and import cover remains healthy.

However, underlying pressures are building as capital flows weaken. Foreign portfolio investors have pulled out sharply, with net outflows of $10.8 billion in March, while net foreign direct investment has remained negative since late 2025. Economists, including Trinh Nguyen of Natixis, warn that despite steady gross inflows, higher outbound investments and cautious sentiment are weighing on the rupee and overall balance of payments.

Additional strain is visible in slowing external borrowings and tight domestic liquidity, as credit growth outpaces deposits. While policy steps to stabilise the currency may have dampened investor confidence in the short term, rising renewable energy capacity offers a structural positive. Still, weak capital inflows and persistent outflows could pose challenges for India’s near-term economic outlook.

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