New Delhi [India], August 18 (ANI): India's capital account flows could rise sharply to around USD 120 billion in FY2027 from just USD 2 billion in FY2026, led largely by higher banking capital and external commercial borrowings, according to a Kotak Institutional Equities strategy report.

'We estimate capital account flows to jump sharply from US$2 bn in FY2026 to around US$120 bn in our base case in FY2027,' the August 16 report said.

Kotak expects banking capital to account for the bulk of these flows, with USD 80 billion projected under this category, including USD 70 billion through Foreign Currency Non-Resident Bank, or FCNR(B), deposits. External commercial borrowings (ECBs) are estimated at USD 20 billion.

The increase would be 'largely led by (1) US$80 bn in banking capital (US$70 bn in FCNR (B) deposits) and (2) US$20 bn in ECBs,' the report said.

Kotak said the sharp improvement in capital flows could help offset pressure from India's weaker current account and support the country's overall balance of payments (BoP) position in FY2027.

The sharp increase in capital flows could strengthen India's overall balance of payments position. In its base-case scenario, Kotak estimates India could post a BoP surplus of USD 61 billion in FY2027, even as the current account deficit widens. 'India's BoP may be paradoxically quite strong in FY2027, through an improvement in capital flows, that may offset the weak CAD,' the report said.

The report estimates India's current account deficit at 1.2 per cent of GDP in its base-case scenario for FY2027, compared with 0.6 per cent, or USD 25 billion, in FY2026. The base case assumes an average crude oil price of USD 85 per barrel.

While capital account flows are expected to rise sharply, Kotak said India's net foreign direct investment flows could remain subdued.

'India's net FDI flows may remain soft, amid (1) likely elevated PE/VC outflows and (2) likely high overseas investment by Indian companies,' the report said.

The report's data showed that net FDI inflows have moderated sharply in recent years as gross outflows increased. Net FDI inflows stood at USD 6.9 billion in FY2026, compared with USD 44 billion in FY2021.

Foreign portfolio investment flows, meanwhile, could remain volatile.

'FPI flows may remain volatile, depending on the relative risk-reward of India versus other markets,' Kotak said. However, it noted some improvement in FPI flows to India over the past two months, led by debt flows on expectations of inclusion in the Bloomberg Global Aggregate Index and moderate equity inflows.

Kotak's broader assessment is that the improvement in capital flows could provide support to India's external position at a time when higher energy import costs and a wider current account deficit remain risks to the economy. (ANI)