In FY26, the total flow of funds in the economy (or net increase during the year) was ₹47tn vs ₹36.6tn in FY25. While this is an impressive jump, it mainly came from bank credit, which accounted for a 62 per cent share, while non-banking sources’ share reduced to just 38 per cent. This is very different from earlier years, when banking and non-banking sectors accounted for nearly 50 per cent share each. The slowdown in mobilisation of funds from the non-banking sector reflects slower NBFC lending and equity issuances. Another factor is that inflows from the foreign sources have stagnated at 11 per cent share, with slowdown in net FDI and ECB inflows. In FY22, foreign sources used to contribute nearly a 30 per cent share of total flows in the economy.
The change in composition reflects two factors — first, tighter global financial conditions, and second, the rise in domestic bond yields. Tighter global conditions are indicated by a sharp rise in UST yields, reflecting worsening US fiscal metrics and inflation pressures. This results in a broad-based slowdown in capital inflows across net FDI, FPI, and external commercial borrowings. As a result, India’s capital account surplus has reduced from 2.6 per cent of GDP in FY24 to an estimated 0.1 per cent in FY26. The West Asia crisis has added to these pressures by further tightening global conditions through higher inflation and fiscal risks.
Domestically, G-sec yields have risen, reflecting concerns about inflation risks and potential fiscal slippage due to cuts in fuel duties and higher subsidy expenditure. Another factor has been the rise in borrowing by the Centre and state governments. Higher G-sec yields have also raised corporate bond yields, reducing issuances and increasing reliance on bank credit. Hence, the robustness of bank credit reflects not only strong domestic growth but also weaker alternative funding sources.
In FY27, gross domestic savings in the economy are estimated to reduce to 30 per cent of GDP from 34 per cent in FY26. This reflects a wider fiscal deficit and lower savings by households and companies due to the surge in fuel costs. The decline in gross domestic savings will constrain the investment cycle, particularly private investment, which has been weak.
In such an environment, it is critical for India to attract foreign savings to offset slower domestic savings. For the RBI, the key challenge will be attracting capital inflows when global conditions are likely to tighten due to the West Asia crisis. A possible solution would be a capital inflow scheme such as FCNR(B) or external commercial borrowings. To make it viable for both investors and borrowers, the RBI may need to subsidise hedging costs. A rate hike at this juncture isn’t warranted, as inflation remains within the target band (2 per cent to 6 per cent). Moreover, in the coming quarters, the impact on domestic growth is expected to become more visible as higher energy prices affect both corporate margins and consumer demand.
The writer is chief economist at IDFC First Bank
 "BANKS, NBFC")