India’s foreign exchange reserves are still adequate by traditional measures, but the cushion could come under strain in FY27 unless the country generates about $30 billion more through capital inflows or current-account savings, according to an HSBC report released on May 18. The bank’s base case is a BoP (balance of payments) deficit of $65 billion next year, driven mainly by a wider current account gap as oil stays elevated.

Reserve cushion under strain

HSBC’s India economists say the country currently has enough reserves by standard yardsticks such as import cover and short-term debt cover. But their dynamic framework, which benchmarks India against the weakest 10th percentile of its own historical reserve experience, suggests the buffer could fall below comfort if the FY27 shock plays out. The report estimates India would need about $30 billion of additional FX reserves to stay above that threshold.

Oil, remittances and inflows

The main risk is the external account, not reserves today. HSBC assumes average crude at $95 a barrel in FY27 and says every 10% rise in oil prices can widen the current-account deficit by about 0.3 percentage point of GDP. It also flags weaker remittances, softer FDI and slower portfolio inflows as additional pressures on the balance of payments. The bank’s forecast puts the current-account deficit at 2.3% of GDP, or $94 billion, in FY27, compared with 0.9% of GDP in FY26.

Policy response

HSBC says the gap can be narrowed through a mix of macro and policy steps. The report says “a larger pump price increase, operationalising recently signed trade deals, and tax changes can help close the gap,” and argues that continued currency adjustment may help reduce the trade deficit over time. It also says India’s 2022 experience showed that higher petrol and diesel prices helped cut the oil import bill by about $20 billion over a year.

That is important because fuel pricing has already started moving. State-run oil retailers raised petrol and diesel prices by ₹3 per litre on May 16, days after Prime Minister Narendra Modi urged citizens to conserve fuel, cut foreign travel, use carpools and public transport, and delay gold purchases amid global uncertainty. The government also lifted customs duty on gold and silver imports from 6% to 15%, part of a broader attempt to curb imports and protect foreign exchange.

Why it matters

The report’s broader message is that India is not facing an immediate reserves crisis, but it is entering a tougher external phase. HSBC says the problem is partly short term — high energy prices — and partly structural, with weaker capital inflows that predate the current oil shock. In its view, a sustained fix will require both near-term austerity and steps that improve India’s ability to attract durable foreign capital.

For policymakers, the reading is clear: reserves are comfortable, but not immune. If crude stays high and inflows do not improve, the RBI may have to keep balancing currency weakness with reserve use, while the government leans harder on fuel pricing, trade execution and tax reforms to reduce pressure on the external account.