India’s reliance on foreign capital to finance its structural trade and current account deficits is becoming a growing macroeconomic vulnerability, according to a recent report by Kotak Institutional Equities. The brokerage highlighted that weakening foreign direct investment inflows and sustained foreign portfolio investor outflows are beginning to expose pressure points in the country’s external balance sheet at a time when global energy prices remain elevated.

India has historically depended on consistent inflows of foreign capital to offset its merchandise trade deficit and support overall balance of payments stability. Strong inflows through FY2024 had provided a cushion against these structural deficits. However, the report suggests that the quality and sustainability of these flows have deteriorated significantly over the past two years.

The concern is becoming more relevant as the current account deficit widens alongside higher crude oil prices. Since India remains heavily dependent on imported energy, elevated oil prices directly impact the import bill and worsen external balances. Kotak Institutional Equities warned that if crude prices remain elevated into FY2027, the pressure on India’s balance of payments could intensify further.

A major area of concern highlighted in the report is the sharp rise in gross FDI outflows. According to the brokerage, gross FDI outflows by foreign entities increased from $27 billion in FY2021 to nearly $45 billion during the first nine months of FY2026. Outward investments by Indian companies also rose materially during the same period, increasing from $15 billion to $28 billion.

The report noted that while gross FDI inflows into India have remained relatively stable, these inflows are increasingly being offset by exits from private equity and venture capital investors, along with stake sales by multinational corporations in their Indian subsidiaries through market transactions and offers for sale. In effect, the net benefit of incoming foreign capital has weakened despite continued headline inflow numbers.

Kotak Institutional Equities believes this trend may persist. Indian corporates are expected to continue investing overseas as part of long-term strategic objectives such as geographical diversification, technology acquisition, and global expansion. At the same time, private equity and venture capital investors are likely to maintain elevated exit activity given the substantial unrealised gains they continue to hold in Indian businesses.

The brokerage estimated that PE and VC investors currently own around $32 billion worth of stakes in large listed Indian firms at prevailing market valuations, excluding significantly larger exposure in unlisted companies. This suggests that future liquidity events and stake monetisation could continue to create outward capital pressure over the medium term.

The report also paints a cautious picture for foreign portfolio investment flows into India. Kotak Institutional Equities expects FPI inflows to remain subdued as investors increasingly allocate capital toward emerging markets with stronger exposure to sectors benefiting from the global artificial intelligence and semiconductor investment cycle.

India’s relatively limited participation in these global themes, coupled with weaker expected earnings growth for FY2027 and its vulnerability to higher commodity prices, has reduced its comparative attractiveness in emerging market allocations. The brokerage said the sustained FPI selling witnessed in Indian equities reflects weakening relative return expectations and slower earnings momentum compared with peer economies.

For Indian financial markets, the implications could be significant. Persistent FPI outflows often translate into pressure on equity valuations, especially in sectors with high foreign ownership. Banking, financial services, technology, and consumer sectors may face periodic volatility if global investors continue reallocating funds toward markets perceived to offer stronger structural growth drivers.

Currency markets could also remain sensitive. A widening current account deficit combined with weaker capital inflows generally increases depreciation pressure on the rupee, particularly during periods of elevated crude oil prices or tighter global liquidity conditions.

From a policy standpoint, the report indirectly underscores the importance of improving India’s competitiveness in high-growth sectors such as advanced manufacturing, semiconductors, digital infrastructure, and export-oriented industries. Policymakers may also need to focus on sustaining domestic investment cycles and reducing dependence on volatile portfolio flows.