ET Graphics: BoP stability tested by outflows & Rupee fall

India's external accounts faced simultaneous stress in FY2025-26: a widening current account deficit (CAD), net foreign portfolio investor (FPI) outflows, an...

What Happened

India's external accounts faced simultaneous stress in FY2025-26: a widening current account deficit (CAD), net foreign portfolio investor (FPI) outflows, and significant rupee depreciation.
The CAD stood at $13.2 billion (1.3% of GDP) in Q3 FY2025-26, compared with $11.3 billion (1.1% of GDP) in the corresponding quarter of the previous year.
Net FPI outflows in Q3 FY26 amounted to $11.4 billion, a major driver of capital account pressure.
The rupee depreciated approximately 1.6%, moving from 83.2/USD (Q3 FY25) to 84.5/USD (Q3 FY26) within-quarter, with further weakening in subsequent months.
Inflows into NRI deposits fell: total NRI deposit inflows were $14.41 billion in FY26, down from $16.16 billion in FY25; FCNR(B) inflows collapsed to $946 million in FY26 from $7.08 billion in FY25.
Policy responses under consideration include incentivising foreign deposits, liberalising capital inflows, and the possibility of state-owned banks issuing foreign currency bonds.

Static Topic Bridges

Balance of Payments (BoP): Structure and Components

The Balance of Payments is a systematic record of all economic transactions between residents of a country and the rest of the world during a given period (typically a quarter or year). India's BoP is compiled and published quarterly by the Reserve Bank of India. The BoP has two main accounts:

Current Account — records: - Merchandise trade (goods exports and imports) - Invisibles: Services (IT, travel, transport), Income (interest, dividends), and Transfers (remittances, grants) - India typically runs a goods deficit offset partly by a services surplus and large remittance inflows.

Capital Account (Financial Account in IMF terminology) — records: - Foreign Direct Investment (FDI) — inflows and outflows - Foreign Portfolio Investment (FPI) — equity and debt - External Commercial Borrowings (ECBs) - NRI deposits (FCNR(B), NRE, NRO) - RBI's foreign exchange reserves changes

Under the double-entry accounting identity: Current Account + Capital Account + Changes in Reserves = 0. A CAD must be financed by a capital account surplus (net inflows) or a drawdown of forex reserves.

RBI publishes BoP data: quarterly, with a lag of one quarter.
India's CAD in Q3 FY26: $13.2 billion (1.3% of GDP).
India's CAD full-year FY26 projection: approximately 1.3% of GDP (vs. ~1% in FY25).
The "safe zone" for India's CAD is generally considered to be below 2.5–3% of GDP (beyond which financing becomes stressed).

Connection to this news: A widening CAD combined with FPI outflows creates a twin deficit in the BoP — both the current and capital accounts are under simultaneous pressure — forcing the RBI to intervene through reserves and consider structural measures to attract stable long-term capital.

NRI Deposits: FCNR(B), NRE, and NRO Accounts as Capital Account Instruments

NRI deposits are a key component of the capital account and serve as a stable source of foreign exchange financing for India's CAD. There are three main types:

FCNR(B) — Foreign Currency Non-Resident (Banks): - Introduced by the RBI on May 15, 1993 (replacing FCNR-A). - Fixed deposits held in foreign currencies: USD, GBP, EUR, AUD, CAD, JPY. - The bank bears the exchange rate risk (unlike FCNR-A, where the RBI bore it). - Interest earned is fully tax-exempt in India; principal and interest are fully repatriable under FEMA. - Tenure: 1 to 5 years. Interest rates capped by RBI at specified maximums. - Used as a forex stabilisation instrument: in 2013, during the "taper tantrum" rupee crisis, the RBI offered a special FCNR(B) swap window at a concessional rate, attracting ~$34 billion in deposits that stabilised the rupee.

NRE (Non-Resident External) accounts: maintained in Indian rupees; interest is tax-free in India; fully repatriable. Inflows in Apr–Dec 2025: $5.06 billion (up from $3.57 billion).

NRO (Non-Resident Ordinary) accounts: maintained in Indian rupees; earnings from Indian sources; repatriation limited to $1 million/year; taxable. Inflows in Apr–Dec 2025: $4.10 billion (up from $3.29 billion).

FCNR(B) inflows FY26: $946 million (down from $7.08 billion in FY25) — a collapse of ~87%.
Total NRI deposit inflows FY26: $14.41 billion (down from $16.16 billion in FY25).
FCNR(B) decline in Apr–Nov 2025: $1.86 billion (down from $6.31 billion in same period FY25).
Shift in NRI preference: away from FCNR(B) (forex-denominated, rate-sensitive) toward NRE/NRO (rupee-denominated, stable local rates).

Connection to this news: The sharp FCNR(B) decline reduces a traditional buffer for BoP stabilisation. Policy discussions about incentivising FCNR(B) through higher rate ceilings or a swap facility mirror the 2013 playbook — when such measures successfully reversed a BoP crisis.

Exchange Rate Management and RBI Tools

The RBI manages the rupee through a managed float regime — it intervenes in foreign exchange markets to prevent excessive volatility, without committing to a fixed exchange rate. Key tools include: - Forex market intervention: RBI sells USD from reserves to absorb excess demand and support the rupee. - Repo rate changes (indirect): higher rates attract capital inflows, supporting the currency. - Reserve requirements and swap windows: special FCNR(B) or NRI deposit schemes with concessional forward-cover costs encourage stable inflows. - ECB liberalisation: relaxing external commercial borrowing limits enables corporates to raise forex debt. - Sovereign/PSU foreign currency bonds: state-owned banks or the Government issuing bonds in international markets to directly raise forex.

India's forex reserves (peak): ~$704 billion (September 2024); fell to ~$635–640 billion range in early 2026 due to intervention.
RBI intervention approach: targets exchange rate volatility, not a specific exchange rate level.
Rupee depreciation Q3 FY26: from 83.2/USD to 84.5/USD (~1.6% within-quarter depreciation).
FPI net outflow Q3 FY26: $11.4 billion — primary near-term driver of capital pressure.

Connection to this news: The combination of widening CAD and FPI outflows represents the same structural stress India experienced in 2013 and 2018. The menu of policy options being discussed — FCNR incentives, capital account liberalisation, PSU foreign currency bond issuance — are all time-tested RBI/MoF responses to BoP stress.

Key Facts & Data

India CAD Q3 FY26: $13.2 billion (1.3% of GDP); Q3 FY25: $11.3 billion (1.1% of GDP).
Full-year CAD FY26 projection: ~1.3% of GDP (vs. ~1% in FY25); "safe zone" is below ~2.5–3% of GDP.
FPI net outflow Q3 FY26: $11.4 billion.
Rupee depreciation Q3 FY26: ~84.5/USD from 83.2/USD (1.6% depreciation within-quarter).
NRI deposit inflows FY26: $14.41 billion (down from $16.16 billion in FY25).
FCNR(B) inflows FY26: $946 million (down ~87% from $7.08 billion in FY25).
FCNR(B) introduced: May 15, 1993; denominated in 6 currencies: USD, GBP, EUR, AUD, CAD, JPY.
2013 RBI FCNR(B) special window: raised ~$34 billion, stabilising the rupee during taper tantrum.
NRE account inflows Apr–Dec 2025: $5.06 billion (up from $3.57 billion).
NRO repatriation limit: $1 million per financial year.
Trade deficit FY26: ~$119.30 billion (widened from ~$94.66 billion in FY25).
BoP compiled by: Reserve Bank of India (quarterly).