Why CEA Anantha Nageswaran says India is facing a ‘Live Balance of Payments Stress Test’

India is facing one of its toughest external-sector challenges in years as rising oil prices, foreign investor exits, a weakening rupee, and slowing capital inflows put pressure on the country’s economy. Chief Economic Advisor (CEA) V. Anantha Nageswaran described the situation as a “live balance of payments stress test,” warning that India’s ability to manage imports, currency stability, and foreign exchange flows is now under real-time scrutiny.

The Balance of Payments (BoP) is essentially a record of all financial transactions between India and the rest of the world. It tracks how much money flows into the country through exports, foreign investments, remittances, and loans, versus how much flows out through imports, overseas investments, debt repayments, and travel spending. A healthy BoP helps maintain currency stability and strong foreign exchange reserves, while a deficit can weaken the rupee and trigger inflationary pressure.

India’s heavy dependence on imported energy makes the situation especially serious. The country imports nearly 90% of its crude oil and around half of its gas requirements. As global crude prices rise due to geopolitical tensions in the Middle East and disruptions around the Strait of Hormuz, India’s import bill has surged sharply. Since oil purchases are made in dollars, increased demand for foreign currency weakens the rupee and makes imports even costlier.

Economists say the stress test has intensified because several economic pressures are hitting simultaneously. India depends heavily on the Middle East not only for oil and gas, but also for fertilizer inputs, remittances from Indian workers abroad, and export markets. Any instability in the region therefore directly impacts India’s economy.

According to a report by JPMorgan, India’s capital inflows have slowed dramatically. Net capital inflows averaged 2.6% of GDP between 2015 and 2019, but fell to 1.4% in 2024 and nearly vanished in 2025 due to declining foreign direct investment and continued selling by foreign portfolio investors.

At the same time, India’s current account deficit is expected to widen significantly. Economists estimate it could rise to 2.5% of GDP in FY27 compared to 0.9% the previous year. The overall BoP deficit may widen to between $65 billion and $70 billion, marking the third straight year of deficits. HSBC noted that India now faces the twin challenge of reducing its current account deficit while attracting sustainable capital inflows.

The pressure is already visible in trade data. India’s merchandise trade deficit widened to $28.38 billion in April as crude oil imports hit a six-month high. Foreign investors have also pulled out more than $20 billion from Indian equities since tensions linked to Iran escalated, adding further strain to the rupee, which has weakened by over 5% since the conflict intensified.

The last time India experienced consecutive BoP deficits on this scale was after the global oil shocks of the 1970s. Economists often compare the risks to earlier crises such as the 1991 balance of payments crisis, when India’s foreign exchange reserves had fallen dangerously low.

Nageswaran believes the current challenge is not temporary but structural. He has identified four major global shifts reshaping the world economy: geopolitical fragmentation, technology bifurcation, energy transition policies, and rising geopolitical risks. According to him, India must prepare for a prolonged period of uncertainty affecting trade, capital flows, and energy security.

Despite the pressure, the CEA said India still has strong foundations, including fiscal consolidation, infrastructure investment, and reforms carried out over recent years. However, he stressed that managing the current account, financing deficits, and preventing further rupee depreciation will remain India’s biggest macroeconomic priorities in FY27.