India’s dollar cushion is wearing thin, Goldman Sachs says

India may have to rely more on policy-led dollar inflows this year as higher oil prices, foreign equity outflows and weaker carry flows put pressure on its external finances, Goldman Sachs said.

“The persistence of the Middle East shock has worsened India’s external balances, while subdued capital inflows imply a likely third consecutive year of balance of payments deficit,” Goldman economists Santanu Sengupta, Arjun Varma and Andrew Tilton wrote in a 4 June report.

The bank expects India to post a balance of payments deficit of 1.5% of gross domestic product (GDP) in calendar year 2026. It has also forecast the current account deficit to widen to 2% of GDP after the Middle East conflict pushed oil prices higher.

The balance of payments, or BoP, records all money moving in and out of a country through trade, services, investment and financial flows. A deficit means more foreign currency is leaving than entering the economy, putting pressure on the rupee unless it is offset by capital inflows or central bank reserves.

Goldman Sachs is not saying India is facing a 2013-style external crisis as India’s external vulnerability indicators remain stronger than in earlier stress periods, especially on import cover and short-term external debt.

“Even so, external vulnerability indicators remain stronger than in past crisis episodes,” the report said.

The problem is that India can no longer count as easily on the flows that helped finance wider current account deficits before the pandemic.

In the years after the global financial crisis, India’s current account gaps were often funded by capital inflows. US rates were near zero, while Indian yields were far higher. That made Indian assets attractive to foreign investors and helped bring in dollar flows.

Goldman defines these rate-sensitive inflows as “carry” flows. They include foreign portfolio debt flows, external commercial borrowings (ECBs) and non-resident Indian deposits. While foreign portfolio debt flows are investments by overseas investors in Indian bonds, ECBs are foreign-currency loans raised abroad by Indian companies.

These flows tend to rise when investors can earn a higher return in India than in the US after accounting for currency risk and hedging costs. Goldman said that advantage has narrowed because US rates are now much higher than they were before the pandemic.

“Rate-sensitive flows likely to stay subdued,” Goldman said.

The bank said India-US rate differentials remain well below pre-pandemic levels, limiting the scope for a meaningful rise in carry flows unless domestic monetary conditions become much tighter.

Foreign equity flows are also weak. Goldman said cumulative foreign equity outflows were about $22 billion in the first five months of 2026. It attributed the pressure to elevated Indian valuations, a softer earnings outlook and rupee depreciation.

That leaves policymakers with fewer easy options. Goldman expects the Reserve Bank of India to keep the repo rate unchanged at 5.25% in June, but said the central bank may announce measures linked to capital flows. The bank still expects 50 basis points of rate increases later this year. One basis point is one-hundredth of a percentage point.

Some of the possible steps listed by Goldman include shortening export-proceeds repatriation timelines, easing rules for foreign investment in government securities and offering tax relief to overseas investors. Tax changes would need coordination with the Ministry of Finance and other regulators.

India has already begun moving in that direction. Last week, the government and the RBI announced measures to attract dollar inflows, including tax changes for foreign investors in government bonds and support for foreign-currency deposits.

Reuters reported that some analysts estimate the measures could bring in about $40 billion. HDFC Bank economists put the potential gross inflows at $50 billion to $70 billion.

The RBI has also moved to lower offshore funding costs. It has offered concessional swaps for external commercial borrowings by public-sector companies and provided support for foreign-currency non-resident deposits.

A swap is a transaction in which one currency is exchanged for another for a fixed period and then reversed later. In this case, concessional swaps can lower the effective cost of raising dollars overseas.

The foreign-currency deposit scheme is linked to FCNR(B), or Foreign Currency Non-Resident Bank deposits. These are deposits that non-resident Indians can place with Indian banks in foreign currency, such as dollars. Because the deposits are held in foreign currency, the depositor does not take rupee depreciation risk.

Punjab National Bank Chief Executive Officer Ashok Chandra told Reuters that Indian banks could raise $35 billion to $40 billion through the foreign-currency deposit scheme. PNB itself plans to raise $2.5 billion to $3 billion, Reuters reported.

Goldman said a repeat of the 2013 FCNR(B) scheme would be harder today. During the taper tantrum in 2013, the RBI offered a special swap window that helped banks raise about $25 billion through FCNR(B) deposits.

That scheme worked because US rates were near zero and the RBI offered banks a concessional swap rate, making the deposits attractive for both banks and depositors. Today, US rates are much higher, which makes foreign-currency deposits costlier and would require a larger subsidy to produce the same effect.

Goldman said dollar issuance by quasi-sovereign entities, companies and banks may be a more practical route. Quasi-sovereign entities are firms or institutions closely linked to the government, such as public-sector companies or state-backed lenders. Their overseas borrowing can help bring dollars into the system without relying entirely on retail deposits from non-resident Indians.

Domestic funding costs may also push more companies offshore. Goldman said certificate of deposit spreads in India have risen to multi-year highs, reflecting tighter short-term funding conditions. If borrowing in dollars becomes cheaper after hedging, companies may have a stronger incentive to raise funds overseas.

The pressure is already visible in markets. Reuters reported that foreign investors bought more than $1 billion of Indian bonds after the latest measures. The rupee has also gained on expectations of inflows and suspected RBI intervention.

India still has larger buffers than it had in earlier external shocks. Services exports and remittances have helped keep the current account from widening more sharply, while reserves remain stronger than in past stress periods.