Kotak sees India posting BoP surplus in FY27; expects 50 bps rate hike in second half
New Delhi, August 6
India is likely to record a balance of payments surplus in FY27, supported by stronger capital inflows and higher foreign direct investment, even as the Reserve Bank of India maintained status quo in its latest monetary policy, according to a Kotak Mahindra Mutual Fund report.
The report said higher capital inflows under the RBI's special measures, along with gross FDI inflows of USD 30.7 billion in the first quarter compared with USD 26.7 billion a year earlier, are expected to strengthen the country's external position.
"On account of capital inflows on account of special measures taken by RBI and Gross FDI in Q1 is higher at USD 30.7 billion as compared USD 26.7 billion last year, India will have a BOP surplus this year," the report said.
While treating the RBI's latest policy as balanced, Kotak said headline inflation for FY27 has been revised lower to 5 per cent from 5.1 per cent due to lower-than-expected inflation in the first quarter. It also projected core inflation at 4.3 per cent for FY27, trending towards 4 per cent by the end of the year.
The report noted that improving domestic activity and easing supply-side pressures had also led to an upward revision in FY27 GDP growth to 6.7 per cent.
Despite the softer inflation outlook, Kotak said it continues to expect a 50 basis point rate hike in the second half of FY27, citing the RBI's inflation projection of 5.3 per cent for the first quarter of FY28 and the likelihood of monetary tightening by the US Federal Reserve during the year.
The report added that the expected rate hike is already reflected in the current yield curve and that additional liquidity from FCNR inflows is likely to support bond yields.
It expects the 10-year government security yield to remain in the 6.70-6.90 per cent range until the next monetary policy, while FCNR-related liquidity could lead to a 15-20 basis point decline in shorter-end yields by September 2026.
For investors, Kotak advised choosing debt funds based on their investment horizon and risk appetite. It said investors with a minimum three-month horizon may consider ultra-short-term, money market and low-duration funds, while those with horizons of at least 12 months may look at corporate bond, short-duration and banking & PSU funds.
For investment horizons of more than 18 months, it recommended gilt, dynamic bond, long-duration, Income Plus Arbitrage FoFs and target maturity funds.
— ANI
Reader Comments
FDI inflows increasing is a positive sign. But if Fed hikes rates, FIIs might pull out money from India. BOP surplus projection seems optimistic. Let's see how it plays out.
Rate hike in second half? That would be a shocker for markets. But Kotak is usually quite accurate with their projections. Debt fund investors should be cautious now.
Interesting analysis from Kotak. The 6.7% GDP growth forecast is encouraging. But their advice on debt funds based on horizon seems sensible for retail investors.
As a small investor, these reports confuse me. One day they say rate cut, next day hike. I'll stick to my FD for now. Safety first. 🏦
The BOP surplus prediction is positive, but the expected rate hike contradicts the softer inflation outlook. Doesn't that seem a bit inconsistent? Someone explain please.
India's external position strengthening is great news. But I wish we focused more on manufacturing and exports rather than relying on capital inflows. Long-term sustainability matters.
We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.