India's Balance Of Payments Faces Risk From Dollar Liquidity Tightness

India's balance of payments remains broadly resilient but is increasingly constrained by global dollar liquidity tightness, leading to currency volatility, including in the rupee.

This environment also poses a risk of downward revisions to FY27 earnings estimates, says ASK Private Wealth. 

According to the report, FCNR deposits are the most stable liquidity for India - its only individuals (non-resident) Indians that invest. It further noted, in 2013, a similar scheme attracted USD 35 billion; this time expectations are pegged at double that number.

While India's external position continues to be supported by strong services exports, remittances, and diversified trade flows, the rising pressure on

dollar supply is creating intermittent stress on financial markets. This is also reflected in elevated long-term yields, as global interest rate dynamics shift and the US-India rate differential narrows to multi-year lows.

ASK Private Wealth highlighted that this environment increases the importance of stable foreign currency inflows such as Foreign Currency Non-Resident (FCNR-B) deposits. 

"Injection of USD 60-70 billion of additional banking deposits will ease liquidity pressure on the banking system, besides taking some currency volatility off the table," the report said. 

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According to the report, long-term yields are likely to remain elevated, supported by conditions in the US. 

Noting that, historically, global crises had triggered strong bull markets in India, as seen during the 2008 Global Financial Crisis, the 2013 taper tantrum, and the 2022 Ukraine conflict, the report said, "A large inflow of dollar liquidity could also lead to broad-based asset price reflation." 

On the other hand, an end to ongoing geopolitical conflicts may result in a positive rerating of FY2028 earnings, driven by easing oil prices and improved supply chain stability. Further support could come from a potential cooling of the AI trade, which may enhance India's relative attractiveness and move it higher on global investors' radar, as per the report. 

Overall sentiment around India has turned "somewhat cautious". While valuations are lower than levels seen in December 2024, there is a risk that FY27 earnings estimates may be revised downward, as per ASK Private Wealth.