India’s balance of payments is likely to post a surplus of around $50 billion in FY27, but will that be enough to ease pressure on the rupee? Normally, a surge in dollar inflows would support the currency, but experts predict that while “market sentiment will be positive towards an appreciation, it may not necessarily mean that the rupee will appreciate”.
A recent SBI research report revealed that India’s balance of payments is expected to post a surplus of around $50 billion in FY27, with the current account deficit (CAD) likely to remain contained at 1% of GDP.
This is basically due to foreign currency inflows from the Reserve Bank of India (RBI)’s special FCNR(B) deposit mobilisation scheme, which has already attracted around $57 billion; another $25–30 billion could come in by the end of August, taking total collections to nearly $85 billion, it added.
“The balance of payment will be in surplus of around USD 50 bn with CAD at 1% of GDP,” the report said.
Why a $50 billion surplus may not mean a stronger rupee?
Theoretically speaking, the logic seems simple! More dollars flowing into India should increase the dollar supply, thereby supporting the rupee. “However, the impact depends on what happens to those dollars once they enter the system,” points out Madan Sabnavis, Chief Economist, Bank of Baroda.
If, for example, $50 billion or $60 billion comes into India through FCNR deposits, banks can effectively swap these dollars with the RBI. The central bank then holds the foreign currency as part of its reserves. In the normal course, it could invest these reserves in assets such as US Treasuries or gold.
Now, if they’re doing something of that sort, it doesn’t increase the supply of dollars in the market. The country’s foreign exchange reserves are rising, but if we look at currency determination, which is based on market supply and demand, the supply of dollars is not actually increasing.
“So while the country is better off because there is a balance of payment surplus, we will have an anomaly saying that product reserves are going up, but the rupee may not be appreciating because the dollars are not actually in the market,” Sabnavis pointed out.
There is another possibility, however. The RBI may use these dollars to close or square off positions in its forward book. If the central bank had previously committed to selling dollars at a future date (maybe two months down the line), it could use the incoming reserves to square off those positions. “In that case, they are putting those dollars into the system. In which case, there will be a kind of mini appreciation that takes place as and when the RBI does so.”
So the logic is very simple here: while FCNR inflows can clearly improve India’s balance of payments and add to the country’s foreign exchange reserves, the impact on the rupee depends on whether those dollars actually enter the market. If the RBI simply absorbs and invests them as reserves, the currency impact could remain limited. If the RBI uses them to unwind forward positions and release dollars into the market, the rupee could see some appreciation, the expert notes.