Currency / INR / External Balance

India's external balance sheet faces increasing pressure as foreign exchange reserves declined by $22.5 billion in the first quarter of fiscal year 2026-27, driven largely by valuation losses and a widening current account deficit. While capital inflows provided some offset, the deficit was exacerbated by a significant portfolio investment outflow and a deepening merchandise trade gap. The Reserve Bank of India has actively managed liquidity through foreign exchange swap facilities, attracting substantial inflows, but persistent outflows and volatile market conditions suggest continued pressure on reserves and the INR, potentially requiring further intervention and impacting future monetary policy decisions.