India's External Account Pressure: Three Operating Risks for Lenders

India's current account deficit has long been financed with relative ease. FDI absorbed a large part of it, and portfolio flows added a further cushion. In FY26, both have thinned to the point where that pattern no longer holds. Net FDI has shrunk sharply, and portfolio flows have turned negative for 2 consecutive fiscal years. The rupee breached 96 per dollar in May 2026.

What matters most for NBFC leadership is where this feeds into operations. There are 3 specific transmission paths: cost of funds, rate trajectory, and portfolio credit quality. Each is visible in current data.

1. When the Financing Cushion Disappears

The Shift in the Financial Account

The current account deficit ran at $12.3 billion in Q2 FY26 and $13.2 billion in Q3, with further widening expected under oil and tariff pressure. India has financed comparable deficits before. What has changed is the financing side.

• Net FDI has compressed sharply. Gross FDI remains above $78 billion annually, but profit repatriation surged from $27 billion in FY21 to $51 billion in FY25. Net FDI fell to $0.4 billion in FY25 and remains compressed in FY26. The cushion that historically offset current account deficits has largely disappeared.

(On the flip side, it is worth noting that BFSI institutions like Sammaan Capital, IDFC First Bank, Yes Bank, and Federal Bank attracted significant strategic and PE equity investment in FY26, reflecting continued investor confidence in Indian financial services.)

• FPI has turned structurally negative. Foreign portfolio investors were net sellers in both FY25 and FY26, the first consecutive-year net outflow since data recording began in FY99. The 2-year total reached $34 billion.

• Reserves have declined. FX reserves fell by $29 billion in FY26 as RBI intervened to slow the rupee's fall.

  
  

How Far From a Crisis

India retains meaningful structural buffers. Services exports and inward remittances together exceed $349 billion annually, broadly covering the FY26 merchandise trade deficit. On a trade-weighted basis, the rupee sits near its most competitive level since 2013. A full-scale balance of payments crisis is not the base case.

The operational friction is nonetheless real. The near-term effects on funding costs and credit quality do not require a crisis to matter.

2. How Rupee Defence Has Stalled Rate Relief

To defend the rupee, RBI sold $50.8 billion in the forex market between April 2025 and January 2026. Dollar sales at this scale drain rupee liquidity from the banking system. Between September and December 2024, total banking system liquidity dropped from Rs 4.6 trillion to Rs 0.4 trillion, a sustained squeeze driven largely by RBI's intervention. That drain constrained how aggressively RBI could cut rates: major banks pushed back their rate cut forecasts explicitly citing FX intervention and tighter systemic liquidity.

The result shows in the data. RBI cut the repo rate by 125 bps through FY25-26. NBFC cost of funds fell by only 10 to 15 bps per quarter. India Ratings in April 2026 went further: it now projects NBFC and HFC borrowing costs will edge up over the medium term, not merely stay flat. MCLR adjustments at banks are slow. Deposit competition keeps banks cautious about passing cuts through. The rate relief NBFCs expected from the easing cycle has not materialised, and the same external pressure that made cuts necessary has constrained their effectiveness.

3. How FPI Outflows Are Hitting Capital Market Borrowing Costs

Spreads Are Already Widening

The FPI outflows documented in Section 1 have a parallel effect on India's fixed income markets. As foreign investors reduce exposure to Indian assets, demand for NBFC bonds and NCDs falls and spreads widen. India Ratings in April 2026 explicitly cited wider bond market spreads, alongside geopolitical uncertainty, as a driver of rising NBFC borrowing costs. This is not a projected risk; it is already visible in the cost of new issuances.

Why the Forward Risk Is Sharpest Here

More than bank borrowing, this channel carries forward risk as the inflation pipeline keeps building. Rupee depreciation and crude above $100 are pushing RBI's own FY27 CPI projection up to 4.6%. Standard Chartered has forecast 50 bps of hikes beginning June 2026, with swap markets pricing in over 40 bps near-term. RBI has been explicit that it does not favour hikes for supply-driven inflation but if CPI approaches the upper end of the 2-6% tolerance band, the inflation targeting mandate limits room for inaction. The repo rate, currently at 5.25%, could move materially higher through FY27.

While bank-funded NBFCs see slow MCLR adjustments, capital market-funded NBFCs face sharper asymmetry. Their bond spreads depend on risk appetite and FPI flows, meaning rate reversals hit new issuances immediately. Because their fixed-rate assets reprice slowly, these NBFCs face severe repricing mismatches and margin compression risk as external conditions tighten.

4. The Credit Stress That Hasn't Fully Surfaced

Where Borrower Pressure Is Building

Rupee depreciation drives imported inflation. Small businesses sourcing imported inputs face higher costs with limited ability to pass them through. Self-employed borrowers and rural households face income compression as consumer prices rise faster than wages. These are the segments NBFCs most depend on for volume: self-employed individuals, MSME operators, small traders.

Headline asset quality looks contained. NBFC gross NPA ratios have declined. But RBI's December 2025 FSR flags that fresh slippages and write-offs are rising simultaneously. The improvement in gross NPAs partly reflects accelerated write-offs, not genuine recovery alone. Economic Survey data for 2024-25 showed that 51.9% of new retail NPAs originated in unsecured books, a segment where many NBFCs concentrated recent growth.

The Import-Exposed Concentration Risk

A specific risk sits with import-dependent MSME borrowers. Small manufacturers and traders whose input costs move directly with the rupee face a squeeze that domestic monetary policy cannot address. The causal chain from currency depreciation to NPA is multi-step, and segment mix and field infrastructure both shape outcomes. But leading indicators are already pointing in one direction. Waiting for 90+ DPD to confirm the trend means the response arrives too late.

5. Building Operational Visibility Into the Friction

The 3 channels above share a common requirement: operational visibility that most NBFC systems were not designed to provide continuously.

1. Portfolio early warning. Fresh slippages are rising even as gross NPAs improve. Detecting cohort-level stress before it surfaces at 90+ DPD requires monitoring across the loan lifecycle, not quarterly aggregate reporting. OneFin's LMS provides this layer of surveillance on a continuous basis.

   
   

2. Multi-scenario ALM. Rate trajectory and spread conditions are uncertain in both directions. Modelling 2 to 3 scenarios within the LMS, rather than a single base case, shows where margin pressure concentrates under each path.

   
   

3. Liability channel tracking. As MCLR-linked and market-based borrowing costs move differently, the cost implications of the funding mix evolve faster than periodic snapshots can capture.

   
   

4. Targeted underwriting controls. Tighter credit decisioning for import-exposed MSME segments and high-risk unsecured cohorts can be applied at the LOS level without broad portfolio restriction.

Conclusion

The macro picture is not a crisis. India's services and remittances base provides real structural resilience. The rupee has already done part of the adjustment. RBI retains the tools to manage domestic liquidity and has demonstrated the willingness to use them.

At the NBFC operations level, the friction is present regardless. Funding costs not easing despite rate cuts, a rate and spread environment that could tighten further, and portfolio stress building in segments that headline NPA numbers do not yet capture: these are structural observations, not worst-case projections. The institutions best placed for the next 12 to 18 months will be those that treat this as a planning input now, rather than waiting for the macro to resolve before adjusting.

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