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Summary
With India’s foreign-exchange reserves at $691 billion, we can breathe easy on the external front for now. Credit the Indian diaspora for some of this. But resident citizens, as Prime Minister Narendra Modi has urged, must do their bit as well.
Prime Minister Narendra Modi’s call for Indians to help conserve foreign exchange in various ways, such as by holding off on foreign travel and using less fuel, made waves as news partly because it has been more than a decade since India’s external sector was last under pressure. With crude trading above $100 per barrel globally, our oil imports are soaking up dollars even as exports face protectionist headwinds.
Ever since war erupted in West Asia, it has been clear that its adverse effect on our balance of payments (BoP) would need to be kept under watch. Now that Indian residents have been asked to help keep the country’s forex expenses low, it is hard to estimate the reduction that may follow.
Thankfully, in such times of flux, the Indian diaspora has usually stood by us, providing a steady source of forex and aiding our BoP stability. As with many other developing countries, India typically runs a current account deficit (CAD).
The latest Economic Survey shows how our merchandise trade deficit is offset by strong net inflows of invisibles, led by widening surpluses in service exports and private transfers.
Such a deficit can be run both smoothly and justifiably if those ‘extra’ imports serve us well, so long as the gap is small enough for capital account inflows to finance, thus keeping the overall BoP steady. A CAD under 2.5% of GDP is usually considered safe.
However, we happen to have a capital crunch too. Portfolio flows into Indian shares from abroad have been in reversal mode and net foreign direct investment (FDI) levels weak.
Prospects of an imminent recovery on the capital account look modest at best. Gross FDI inflows may have held firm through most of 2025-26, but net FDI will likely still be in single digits. Reserve Bank of India (RBI) data for its first 11 months, with provisional figures for January and February, puts the net figure at about $6.2 billion.
Outward FDI and repatriations explain this, like in 2024-25, when net FDI was barely $1 billion. Net foreign portfolio investment (FPI) has fared worse, with $16.5 billion having left last fiscal year and this ‘hot money’ proving elusive this year too.
A weakened BoP has one of two possible consequences. If left to market forces, it results in the rupee losing value in dollar terms as the exchange rate falls in accordance with relative demand (more for dollars, less for rupees).
While imports made dearer this way reduce demand for imported items, the flip side of it is inflation (most acutely in essentials whose sales are relatively price inelastic).
But if RBI opts to intervene by using its forex reserves to buy rupees in support of India’s currency, then that adjustment does not happen. Instead, the import bill stays high and our forex buffer shrinks. What policy mix to deploy in such cases is not an easy call to take.
In all this, a silver lining has been inward remittances from India’s diaspora. According to the International Organization for Migration’s World Migration Report 2026, India was the world’s largest recipient of these flows in 2024 with nearly $138 billion, a sum that has more than doubled from almost $53 billion in 2010. Mexico, the next largest recipient in 2024, was a distant second with $68 billion. At last count, RBI had forex reserves of $691 billion, equivalent to about 11 months’ import cover.
Our diaspora has steadily been sending money home. For this, let’s be thankful. But we must not take remittances for granted. We residents must do our bit as well.
English (US) ·