Defying Washington’s tariffs, India’s external sector stays robust. The Economic Survey 2025-26 highlights service growth, trade expansion and new trade alliances as the drivers of stability.
India’s total exports hit a landmark $825.3 billion in FY25, maintaining momentum despite global trade tensions. During the first nine months of FY26, merchandise exports rose by 2.4 percent, while services surged by 6.5 percent. This services surplus has been crucial in anchoring the current account deficit at 0.8 percent of GDP in H1 FY26.
However, uncertainty over ongoing trade negotiations with the US has created ripple effects across India’s financial markets. Foreign portfolio investors adopted a cautious stance, with the April-December 2025 period seeing net outflows of $3.9 billion—a sharp reversal from $10.6 billion in net inflows during the same period last year. The volatility reflected three months of substantial inflows countered by six months of outflows.
According to the Survey, foreign portfolio investment has remained sluggish this year. This ‘tepid’ performance is attributed to global market volatility and a massive capital pivot toward AI-driven opportunities in the US, Taiwan, and Korea.
A swing in capital flows resulted in a $ 6.4 billion balance of payment deficit for H1 FY26, a sharp contrast to the previous year’s surplus of $23.8 billion. This shortfall was financed through India’s forex stockpile.
Market anxiety over the outcome of a potential US-India trade deal has also pressured the rupee, which depreciated approximately 6.5 percent against the dollar between April 1, 2025, and January 22, 2026. The Survey, however, categorises the currency movement as “orderly” and notes that long-term exchange rate dynamics will be driven by structural fundamentals, such as “productivity gains, export diversification towards higher-value goods and services, deeper integration into GVCs and a stable policy environment”, rather than short-term trade tensions.
Despite these challenges, bright spots emerged in India’s investment landscape. Gross FDI inflows grew 16.1 percent year-over-year through April-November 2025, suggesting sustained foreign confidence in India’s medium-term prospects. However, net FDI growth was restrained by a significant 34.9 percent increase in Indian companies investing overseas. This was slightly offset by a 4.2 percent dip in repatriation flows (investors pulling money out).
Moreover, New Delhi has accelerated trade diversification efforts with recent agreements with the UK, Oman and New Zealand, and the EU. Active negotiations with Washington on a trade deal continue as well.
The Economic Survey acknowledges that while US tariffs pose immediate challenges, medium-term concerns extend beyond bilateral trade tensions. Tightening immigration controls globally could constrain remittance growth—a critical external funding source that has exceeded gross FDI inflows in most years.
“Therefore, it becomes imperative that one of the overarching priorities of India’s policies must be to enhance its competitiveness on the global stage and improve its attractiveness as an investment destination,” the Survey notes.
First Published: Jan 29, 2026, 14:46
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