India's Capital Flows Receive Policy Support as RBI and Government Announce Measures, DBS Says

India's external balance sheet has faced sustained pressure over the past year, with weaker capital inflows contributing to a balance of payments deficit in fiscal year 2026 (FY26), according to DBS economist Radhika Rao.

Slower Capital Inflows Weigh on External Balances

In a note cited by FXStreet, Rao identified slower foreign portfolio inflows and a narrower net Foreign Direct Investment (FDI) position as key factors behind the deterioration. She noted that weakening capital flows had remained a persistent challenge for India's external balances for more than a year and that, together with softer offshore borrowing, they contributed to the balance of payments moving into deficit during FY26.

The early part of FY27 also saw sizeable equity outflows. However, DBS said foreign portfolio investment (FPI) debt flows and FDI have shown signs of improvement, providing some support to the capital account.

RBI and Government Introduce Support Measures

To address external financing pressures, the Reserve Bank of India (RBI) and the central government introduced a series of measures in June 2026 aimed at supporting capital inflows. While DBS did not provide details of all the measures in the cited commentary, the policy response suggests authorities are seeking to strengthen external financing conditions amid ongoing challenges.

Inflation Outlook Shifts on Geopolitical Risk

On monetary policy, Rao noted that geopolitical developments have become a more prominent inflation risk than weather-related disruptions associated with the monsoon. Reflecting this assessment, DBS has removed its FY27 rate-hike forecast from its base-case scenario and now sees downside risk to its year-end forecast for India's 10-year government bond yield of 6.9%.

Fiscal Deficit May Widen Modestly

DBS expects India's fiscal deficit to widen modestly in FY27 as higher subsidy spending and softer revenue growth weigh on public finances. According to the report, this combination may present additional challenges for policymakers as they seek to balance economic support with fiscal discipline.

Market Focus

From a market perspective, developments in capital inflows, monetary policy expectations and fiscal trends are likely to remain important factors for India's financial markets during FY27. Additional commentary from the RBI or further policy measures related to capital flows could influence government bond yields and the Indian Rupee as market expectations evolve.