In the week through March 6, India’s foreign exchange reserves fell by $11.68 billion, the most in over a year. The reserves had depleted in both the second and third quarters of the current fiscal year—by $10.9 billion and $24.4 billion respectively on a balance-of-payments basis.
In April-December 2025, they shrank by $30.8 billion compared with a depletion of $13.8 billion in the year-ago period. A high merchandise trade deficit, driven by sharp increases in gold and silver imports and stagnant exports, has exerted some pressure on the current account lately.
But even starker are the unusually weak inflows into the capital/financial account, which, during most quarters in recent decades, used to comfortably finance the current account deficit (CAD) and result in an addition to reserves.
Net inflows of $14.4 billion
Net inflows of $14.4 billion into the capital account in Q3FY26, for instance, was a relatively low figure when compared with the regular pattern. Foreign direct investment (FDI) inflows were negative on a net basis for the four months through December. Net outflows of $5.42 billion were witnessed in the period.
Similarly, in 10 out of the 14 months through February 2026, foreign portfolio investors (FPIs) have been net sellers of Indian equities. With the West Asia war exacerbating the external situation, the outflows have sharply accelerated in the current month—FPIs have net sold Indian shares worth $7.3 billion in the 10 trading sessions through March 16.
Apart from factors like wider merchandise trade deficits and weaker net capital inflows, increased currency market volatility and valuation changes also contributed to the slowing pace of reserves build-up in recent quarters. A rising share of gold in the forex reserves on account of the skyrocketing prices of the yellow metal could not arrest this declining trend in reserve accumulation.
FIIs exit from India
True, foreign investors’ exit from India could be attributed to the prolonged geopolitical upheaval. But an element of caution regarding India’s growth numbers and a re-evaluation of its growth potential itself also appear to be behind the capital outflows.
Obviously, hordes of portfolio investors have turned sceptical about staying invested in India, with the rupee’s relentless fall undermining the returns they could fetch in their respective local currencies and the US dollar. A sharp decline in reserves last week was also caused by the Reserve Bank of India’s (RBI) heavy dollar sales to stem the rupee’s fall.
A vicious cycle appears to have been triggered. High repatriations and disinvestments by foreign firms also can’t be seen as a vote of confidence in the Indian economy. All this, combined with the plausible sharp widening of the CAD due to a likely spike in the energy import bill (Brent crude at $100 could inflate oil imports alone by nearly $50 billion or 30% annually)—and a slowing inward remittances add to the concerns.
RBI Governor Sanjay Malhotra in his latest monetary policy speech cited that forex reserves of nearly $724 billion as of January 30 were enough for merchandise import cover of more than 11 months, and asserted that external financing requirements would be met comfortably.
On a similar note, the Economic Survey 2025-26 lamented that India’s “strongest macroeconomic performance in decades” occurred when the global system no longer rewards such success with currency stability, capital inflows, or strategic insulation. Such perorations, however, are unlikely to detract from the emerging concerns about the twin deficits—on the current account and fiscal fronts—or foreign investors’ increasing wariness about India.