Kotak Predicts India’s FY27 BoP Surplus Amid Rate Hike

Kotak Mahindra Mutual Fund projects India will achieve a balance of payments (BoP) surplus in fiscal year 2027, anticipating robust capital inflows and increased foreign direct investment. This forecast comes even as the firm expects a potential 50 basis point interest rate hike in the latter half of FY27.

Bolstering India’s External Position

The report highlights significant growth in gross foreign direct investment (FDI) inflows during the first quarter. These inflows reached USD 30.7 billion, marking an increase from USD 26.7 billion recorded in the previous year.

• Gross FDI inflows Q1: USD 30.7 billion
• Previous year Q1: USD 26.7 billion

Revised Inflation and Growth Outlook

Kotak has revised India’s headline inflation for FY27 downwards to 5% from its earlier projection of 5.1%. This adjustment follows lower-than-expected inflation observed in the first quarter of the fiscal year.

• Headline inflation FY27 (revised): 5%
• Core inflation FY27 (projected): 4.3%
• GDP growth FY27 (revised up): 6.7%

Core inflation is now projected to trend towards 4% by the end of FY27, while an improved domestic economic activity and easing supply-side pressures have led to an upward revision in India’s GDP growth to 6.7% for the same period.

Anticipated Rate Hike Despite Favorable Outlook

Despite the more favorable inflation outlook, Kotak still anticipates a 50 basis point interest rate hike in the second half of FY27. This expectation is influenced by the Reserve Bank of India’s (RBI) inflation projection of 5.3% for the first quarter of FY28.

The potential for monetary tightening by the US Federal Reserve during the year also contributes to this outlook. Kotak notes that the current yield curve already reflects this expected rate hike, indicating market anticipation.

Impact on Bond Yields and Investor Recommendations

Additional liquidity stemming from Foreign Currency Non-Resident (FCNR) inflows is expected to provide support for bond yields. The 10-year government security yield is projected to remain within the 6.70-6.90% range until the next monetary policy review.

FCNR-related liquidity could potentially lead to a 15-20 basis point decrease in shorter-end yields by September 2026. For investors, Kotak advises selecting debt funds based on their specific investment horizon and risk appetite.

• For 3+ month horizon: ultra-short-term, money market, low-duration funds.
• For 12+ month horizon: corporate bond, short-duration, banking & PSU funds.
• For 18+ month horizon: gilt, dynamic bond, long-duration, Income Plus Arbitrage FoFs, target maturity funds.