The macro environment in India looks stable and resilient, despite the scare of war and trade uncertainties. The south-west monsoon has started on a buoyant note, and IMD reconfirmed its forecast of above normal (106% of LPA) for the current season. Enhanced dividend payout by the RBI has lessened fiscal slippage concerns. Concerted efforts by the RBI to improve system liquidity have also yielded positive results. Fiscal strength, benign inflation outlook, and improved liquidity have resulted in the benchmark 10yr bond yields falling to the lowest level since 2021; reversal in FPI flows since March 2025; stability in currency and improved growth outlook.
Despite notable stability there are few areas of concern that investors should be mindful of. In particular, I shall be watching the development of external situations closely.
External situation - not worrying presently, but could deteriorate
India's external sector has shown resilience in recent years, but there are signs of strain. The merchandise trade deficit hit a near-record high of $26.42 billion in April 2025, driven by a 19.12% surge in imports outpacing a 9.03% export growth. This reflects a structural issue in India's trade balance, with heavy reliance on imported crude oil, gold, and electronics. While presently foreign exchange reserves are ~US$686 billion in January 2025, covering over 10 months of imports, the creeping depreciation of the rupee and global uncertainties (e.g., aggressive trade negotiation and geopolitics) add pressure.
The situation isn't critical yet, thanks to robust reserves and services exports, but the trend warrants caution as external vulnerabilities could escalate if global conditions worsen
Trade balance remains delicate
India's merchandise trade deficit for FY25 (April 2024–March 2025) has widened significantly, reaching $202.42 billion for the first eight months (April–November 2024), compared to $194.6 billion in the same period of FY24. This deterioration is driven by a faster rise in imports (8.3% growth to $486.73 billion) than exports (2.2% growth to $284.31 billion). November 2024 alone saw a record-high monthly deficit of $37.8 billion, fueled by a 27% surge in imports to $69.95 billion, largely due to a 4.3-fold jump in gold imports, alongside increases in electronics (17.4%), petroleum products (7.9%), and vegetable oil (87.8%). Exports, however, contracted by 4.8% to $32.1 billion in November, a 25-month low, partly due to declining petroleum prices.
The overall trade deficit (goods and services combined) is estimated at $94 billion for FY25, per posts on X, reflecting a structural imbalance. The trade deficit with China has surged to $99.2 billion, driven by an 11.5% rise in imports ($113.5 billion) and a 14.5% drop in exports ($14.25 billion). Conversely, India’s trade surplus with the US grew to $41.18 billion, with exports up 11.6% to $86.51 billion. The services trade surplus, estimated at $131.3 billion for April–December 2024, provides some relief, driven by strong IT and financial services exports. However, the current account deficit (CAD) is projected to widen to 1.4–2% of GDP in FY25, with Q3 FY25 potentially hitting 2.8% due to the November trade shock.
Trade deals with the UK, and potential trade deal with the US could impact trade balance negatively in the short term.
Despite intense efforts, India’s reliance on imported crude oil (88% of energy needs), gold, and electronics, alongside structural manufacturing gap, has not diminished materially. There have been some efforts to boost domestic manufacturing through monetary and fiscal incentives, but so far most of the investment has occurred in low value add businesses.
BoP Challenges
H1 FY25 (April–September 2024) BoP surplus was $23.8 billion, but 3QFY25 negative BoP of US$37.7bn on persistent FPI outflows and poor net FDI flows, raise some concerns over BoP for FY25; even though the projected current account surplus and potential stabilization in capital flows have shown promise in 4QFY25.
The BoP is expected to remain manageable, with a full-year CAD of 0.8–1.4% of GDP ($30–55 billion). A Q4 current account surplus could offset earlier deficits, but sustained FPI outflows and trade imbalances pose risks.
Global uncertainties (widening trade deficit, FDI slowdown, remittances slowdown due to the proposed remittance tax in the US, and domestic structural gaps pose strong headwinds for India’s BoP.
FDI slowing
Gross FDI Inflows in India were $81.04 billion in FY25, a 14% increase from $71.1 billion in FY24. FDI equity inflows rose by 45% to $29.8 billion (Rs. 2,58,873 crore) in H1 FY25 (April–September 2024), reversing three years of contraction.
However, net FDI inflows dropped to a record low of $0.353 billion in FY25, down 96.5% from $10 billion in FY24, due to large-scale repatriations and increased outward investments by Indian firms. Repatriations surged to $44.5 billion in FY24 and continued to be significant in FY25, driven by profitable exits through initial public offerings (IPOs) like Hyundai Motor and Swiggy, and divestments (e.g., Singtel’s Airtel stake, BAT’s ITC divestment). A key Swiggy investor reportedly earned over $2 billion post-IPO.
FDI slowdown could have some structural element as relative to GDP, net GDP has been declining for the past five years, and has fallen to the lowest level in more than two decades.
Net FPI equity flows negative since 2021
Net FPI equity flows (Primary market and secondary market) into India have been negative for the past four and half years (January 2021-YTD2025) now. A strong global liquidity event could perhaps reverse the trend, but so far there is little visibility of net FPI flows improving materially in the near term; notwithstanding the positive flows in the past three months.
Oil price and weaker USD offer some relief
Declining oil prices in early 2025 have eased pressure on India's import bill, given its heavy reliance on imported crude (85% of energy consumption). A weaker USD also reduces the cost of dollar-denominated imports and debt servicing. However, relying on these external factors is risky, as oil prices are volatile (e.g., influenced by OPEC decisions or geopolitical tensions), and the USD's trajectory depends on U.S. monetary policy. India needs to accelerate domestic energy production (e.g., renewables, green hydrogen) to reduce this vulnerability.
…but relying on externalities may not be a great idea
Dependence on favorable oil prices or a weaker USD is unsustainable, as these are beyond India's control. A stronger focus on structural reforms—such aggressive boost to manufacturing, enhancing export competitiveness, and reducing import dependency—would provide a more stable foundation. Additionally, diversifying trade partners and pursuing free trade agreements (e.g., with the EU, Japan) could mitigate risks from global volatility.
In conclusion, India's external situation is not yet alarming but shows clear signs of deterioration. The delicate trade balance, negative BoP, and volatile capital flows highlight structural weaknesses, particularly import dependency and sensitivity to global shocks. While forex reserves and services exports provide resilience, reliance on external factors like oil prices or USD weakness is risky. Fiscal slippages and food inflation add domestic pressures.
