Kotak Mahindra Mutual Fund expects India to achieve a balance of payments surplus in FY27, supported by strong foreign investment. While GDP growth is projected at 6.7% and inflation at 5%, the report forecasts a 50 basis point interest rate hike in the second half of the year, which could influence debt market yields.
India’s balance of payments is set to shift into a surplus for fiscal year 2027, according to a new report by Kotak Mahindra Mutual Fund. This outlook suggests that the country expects to bring in more foreign capital than it spends, a trend being supported by stronger foreign direct investment (FDI) inflows. For the first quarter of FY27, gross FDI inflows have already reached USD 30.7 billion, showing a healthy increase compared to the previous year.
Growth and Inflation Outlook
The fund house has raised its GDP growth projection for FY27 to 6.7%, citing improved domestic economic activity. At the same time, the report has lowered its estimate for headline inflation to 5%, down from its previous forecast of 5.1%. This indicates that supply-side pressures are easing, helping to balance the overall economic picture.
Interest Rate Expectations and Global Factors
Despite the positive domestic growth and inflation figures, the report suggests that interest rates may not remain at current levels. It anticipates a 50 basis point (0.50%) rate hike in the second half of the year. This expectation is driven by the need to align with the Reserve Bank of India’s (RBI) inflation targets for early FY28, as well as the anticipated monetary tightening by the U.S. Federal Reserve, which influences global interest rate trends.
Debt Market and Bond Yields
The report indicates that the 10-year government bond yield is expected to stay in the 6.70% to 6.90% range until the next monetary policy review. Additionally, the liquidity expected from foreign currency non-resident (FCNR) inflows may help lower short-term yields by 15-20 basis points by September 2026.
For investors, the report suggests that debt fund selection should be aligned with their specific time horizons. It notes that investors with a minimum three-month view may look at ultra-short-term or money market funds, while those with a longer time frame of 18 months or more might explore gilt, dynamic bond, or target maturity funds. As interest rates fluctuate, investors should remain aware that these changes directly affect bond prices and, consequently, the returns on debt-oriented mutual funds.