In recent years the South Asian  region has witnessed an unprecedented succession of external sector crises. Sri Lanka defaulted on its sovereign debt in 2022, Pakistan has repeatedly depended on the International Monetary Fund (IMF) for financial assistance, Bangladesh has faced increasing pressure on its foreign exchange reserves and exchange rate, while Nepal, Bhutan and the Maldives continue to remain vulnerable because of their dependence on a limited number of foreign exchange earning sectors.

Against this backdrop, India presents an interesting paradox. It is the largest economy in South Asia, the world's third-largest importer of crude oil, deeply integrated with global financial markets and heavily dependent on international trade. Yet, unlike many of its neighbours, it has displayed  resilience against external shocks but  also seems not enough resilient  to control its  value of the currency against the US dollar.

Some Questions

Some questions seem relevant here. Is  India's balance of payments determined primarily by the monetary policy of the US Federal Reserve? Do fluctuations in global crude oil prices remain the decisive factor? Has the Reserve Bank of India (RBI) insulated the economy through prudent management of the rupee? Or do remittances, software exports and foreign investment now matter more than traditional merchandise trade?

The answer seems to be a bit  more complex than any single explanation. In short, in today’s  world,India's balance of payments   is the outcome of an interaction between global finance, energy markets, domestic macroeconomic management and structural transformation. It is this combination of factors  rather than any one policy measure, that is relevant for India.

The balance of payments records every economic transaction between a country and the rest of the world. It consists of the current account, which includes trade in goods and services, income and current transfers such as remittances, and the capital and financial account, which records foreign direct investment (FDI), portfolio investment, external commercial borrowings and other capital movements.

Persistent deficits in these accounts for any country  unless financed sustainably, eventually lead to currency depreciation, depletion of foreign exchange reserves and, in extreme situations, external debt crises.

Experience Across South Asia

Recent events across South Asia demonstrate this relationship vividly.

Sri Lanka's external crisis emerged from a combination of declining tourism receipts, rising external debt repayments, policy errors and depletion of foreign exchange reserves. Pakistan continues to experience recurring balance of payments pressures because its export base has remained narrow while energy imports and external debt obligations have increased steadily. Bangladesh, which for many years was regarded as one of South Asia's strongest performers because of its garment exports and overseas remittances, has also faced external sector pressures following higher global energy prices and weaker export demand.

These experiences underline an important lesson. Countries dependent upon one or two major sources of foreign exchange remain highly vulnerable to global shocks.

India's experience has been fundamentally different.

India’s Foreign Exchange Cushion

According to the Reserve Bank of India, India's foreign exchange reserves stood at US$666.9 billion in the week ending 26 June 2026, among the largest reserve holdings in the world. These reserves provide an important cushion against temporary disruptions in international financial markets and reassure investors regarding India's ability to meet its external obligations.

Even more striking has been the evolution of India's current account.

According to RBI data, India recorded a current account surplus of US$7.1 billion, equivalent to 0.7 per cent of GDP, during the January–March quarter of 2025–26. For the financial year as a whole, the current account deficit remained modest at approximately 0.6 per cent of GDP, despite continuing global uncertainty and elevated geopolitical tensions.

These figures deserve careful attention because they contradict the widespread belief that India's merchandise trade deficit automatically translates into external weakness.India continues to import substantially more merchandise than it exports. During the January–March 2026 quarter alone, the merchandise trade deficit amounted to approximately US$83 billion. Ordinarily, such a deficit would have created severe external pressures.instead, the deficit was largely offset by the remarkable strength of India's "invisibles"—services exports and remittances.

Net receipts from services reached approximately US$60 billion during the quarter, while private transfer receipts, consisting mainly of remittances from Indians working abroad, exceeded US$30 billion. These two components together have fundamentally altered the structure of India's balance of payments.

Indeed, India's external sector today bears little resemblance to that of the early 1990s. During the balance of payments crisis of 1991, India possessed foreign exchange reserves sufficient to finance barely a few weeks of imports. The country was compelled to seek emergency assistance and undertake far-reaching economic reforms. Liberalisation fundamentally changed India's engagement with the world economy. Trade expanded, foreign investment increased, software exports grew exponentially, remittances surged and the RBI gradually accumulated one of the world's largest reserve holdings.

Influence of US monetary policy

hree decades later, the sources of India's external strength are considerably more diversified than those of most South Asian economies.this distinction becomes particularly important when global financial conditions deteriorate.The monetary policy of the US Federal Reserve continues to influence virtually every emerging economy. Higher American interest rates attract global capital towards dollar-denominated assets, often leading to portfolio outflows from developing countries. Such episodes were witnessed during the "Taper Tantrum" of 2013 and again during the post-pandemic monetary tightening cycle.

No South Asian country remains immune from these developments.

However, the consequences differ significantly depending upon the underlying strength of each country's external accounts.

For economies characterised by limited reserves, high external debt and narrow export structures, capital outflows rapidly translate into exchange rate depreciation and external financing difficulties.

India, while affected by the same global financial cycle, has generally demonstrated greater resilience because capital flows constitute only one component of a much broader external sector.

The Oil Price Burden

This broader foundation may well be India's greatest comparative advantage in an increasingly uncertain world.If the US Federal Reserve shapes the financial environment within which South Asian economies operate, energy prices remain the single biggest determinant of their external accounts. This is particularly true for India, Pakistan, Bangladesh and Sri Lanka, all of which depend heavily on imported petroleum.india imports nearly 85 per cent of its crude oil requirements, making it one of the world's largest oil importers. Consequently, every increase of US$10 per barrel in crude oil prices significantly enlarges the country's import bill, widens the merchandise trade deficit and exerts pressure on the current account. The oil shocks following the Russia–Ukraine conflict demonstrated how quickly higher energy prices can spill over into inflation, fiscal balances and exchange-rate management across South Asia.

Yet India has been better placed than most of its neighbours to absorb these shocks. The reason lies in the composition of its foreign exchange earnings.

Unlike Pakistan or Bangladesh, whose export earnings remain concentrated in relatively few sectors, India derives foreign exchange from a remarkably diversified portfolio. Software services, business process management, pharmaceuticals, engineering goods, chemicals, gems and jewellery, tourism, professional services and remittances all contribute to the external account. This diversification has reduced dependence on any single source of foreign exchange.

Rise of Services Exports

Perhaps the most important structural change in India's balance of payments has been the rise of services exports. Three decades ago, merchandise exports dominated external trade. Today, information technology, financial services, consulting, engineering, research and development, and digital services have become major earners of foreign exchange.

According to the RBI, net services receipts exceeded US$60 billion during the January–March 2026 quarter, largely offsetting the merchandise trade deficit. No other South Asian economy enjoys such a large and sustained services surplus.

Equally important are remittances. According to the World Bank, India continues to be the world's largest recipient of remittances, receiving well over US$100 billion annually, with recent estimates exceeding US$135 billion. These transfers from Indians working in the Gulf, North America, Europe, Australia and other regions have become one of the most stable components of the current account. Unlike portfolio investments, remittances do not suddenly reverse during periods of financial uncertainty. Instead, they often increase when families at home face economic stress.

Capital Inflows

Another distinguishing feature of India's external sector is the composition of capital inflows. Public debate frequently focuses on Foreign Institutional Investors (FIIs) because their decisions immediately influence stock markets and exchange rates. Large portfolio inflows strengthen the rupee, while sudden withdrawals create market volatility. However, FIIs represent only one component of India's capital account and are among its most volatile elements.

By contrast, Foreign Direct Investment (FDI) represents long-term commitments to production. Investments in manufacturing, logistics, renewable energy, digital infrastructure and advanced technologies create productive assets and future export capacity. Countries that rely predominantly on volatile portfolio flows remain vulnerable to shifts in global investor sentiment. Those that attract sustained FDI generally enjoy greater external stability.

The Reserve Bank of India occupies an important position in this framework. Unlike central banks operating under fixed exchange-rate regimes, the RBI follows a managed float, allowing the rupee to adjust to market forces while intervening to smooth excessive volatility. Its objective is not to defend a predetermined exchange rate but to preserve orderly market conditions.The accumulation of US$666.9 billion in foreign exchange reserves illustrates this strategy. These reserves are not intended merely as a symbol of financial strength. They enable the RBI to meet temporary shortages of foreign currency, reassure international investors, finance essential imports during periods of market stress and reduce the likelihood of speculative attacks on the rupee.

Contrasts Within South Asia

However, reserves alone cannot guarantee external stability. They must be supported by sound macroeconomic policies, moderate external debt, credible institutions and sustainable economic growth.The contrast within South Asia is instructive. 

Pakistan's external sector has remained under persistent pressure because exports have failed to keep pace with rising imports and debt servicing obligations. Frequent exchange-rate adjustments, recurring IMF-supported programmes and periodic reserve shortages have constrained economic policy.

Sri Lanka's crisis demonstrated the dangers of excessive dependence on tourism, external commercial borrowing and inadequate reserve management. When tourism receipts collapsed during the pandemic, foreign exchange earnings declined sharply while debt repayments continued, culminating in default.

Bangladesh presents a more nuanced picture. Its remarkable success in garment exports transformed it into one of South Asia's fastest-growing economies for nearly two decades. Nevertheless, concentration in a single export sector has increased vulnerability to fluctuations in global demand. Rising energy prices have further exposed weaknesses in the external account.

Nepal's economy depends heavily on remittances, which finance a substantial proportion of imports. Bhutan relies primarily on hydropower exports to India, while the Maldives remains closely linked to international tourism. Each of these countries has achieved notable successes within its own development model, but each also illustrates the risks of dependence on a limited number of foreign exchange earning sectors.

India's comparative advantage lies precisely in avoiding such dependence.

Its external sector rests upon several pillars: merchandise exports, services exports, remittances, foreign direct investment, portfolio investment, tourism, and a large domestic market that attracts international capital even during periods of global uncertainty. This diversified structure has made India's balance of payments considerably more resilient than those of most neighbouring economies.

External Value of Domestic Currency

The Indian rupee has however  depreciated  by about 34% between  2020 to 2026;  so far Pakistani rupee has seen much larger depreciation over the last few years (well over 20% in some years); Sri Lankan rupee lost over 40% during the 2022 crisis before recovering partly; Bangladeshi taka around 20–30% cumulative depreciation since 2022.

Nepalese rupee moves almost exactly with the Indian rupee pegged to the Indian rupee .Bhutanese ngultrum moves one-for-one with the Indian rupee pegged to the Indian rupee.

Changing Regional Outlook

The regional outlook, however, is changing rapidly. The gradual reconfiguration of global supply chains, heightened geopolitical competition, and the search for alternatives to concentrated manufacturing locations present South Asia with significant opportunities. India has sought to position itself as a preferred destination for manufacturing investment through production-linked incentive schemes, infrastructure expansion and logistics improvements. Bangladesh continues to strengthen its manufacturing capabilities, while Sri Lanka and the Maldives are attempting to revive tourism. Nepal and Bhutan are investing in energy and connectivity.Whether these initiatives translate into stronger balance of payments positions will depend not merely on domestic reforms but also on the evolving global economic environment.

Least Integrated Region

One emerging trend deserves particular attention. South Asia has traditionally been one of the least economically integrated regions in the world. Intra-regional trade accounts for only a small proportion of total trade, far below the levels observed in East Asia or Europe. Greater regional connectivity, cross-border electricity trade, transport corridors, digital commerce and investment cooperation could significantly improve the external resilience of all South Asian economies.

Economic geography increasingly favours cooperation. Political realities, unfortunately, have often limited its potential. Nevertheless, the long-term sustainability of South Asia's external sector will depend not only on individual national policies but also on the region's ability to strengthen economic integration and diversify its engagement with the global economy.

Concluding observations

The next decade is likely to test the resilience of South Asia's external sector more severely than the previous one. Three structural changes are already reshaping the region's balance of payments.

The first is the transformation of the global financial environment. The era of abundant liquidity and near-zero interest rates that followed the global financial crisis has ended. Higher interest rates in advanced economies increase borrowing costs, encourage capital to flow towards safer dollar assets and reduce the availability of external finance for developing countries. South Asian economies with large external financing requirements or high short-term debt will remain particularly vulnerable to such shifts.

The second is the changing nature of global trade. Protectionist tendencies, geopolitical fragmentation and supply-chain diversification are encouraging multinational firms to reconsider the geographical distribution of production. For India, this presents an opportunity to expand manufacturing exports beyond traditional sectors. Bangladesh, too, can build upon its success in garments by diversifying into pharmaceuticals, electronics and higher-value manufacturing. Regional economies that fail to diversify risk remaining exposed to external shocks.

The third transformation is the global transition towards cleaner energy. Although renewable energy promises to reduce dependence on imported fossil fuels over the long term, the transition itself will require significant investments in technology, critical minerals and infrastructure. Countries that successfully manage this transition will strengthen both their energy security and their balance of payments.

Need for Export Diversification

For South Asia as a whole, the policy agenda is equally clear. Countries across the region need broader export baskets, greater participation in global value chains, stronger domestic institutions and more sustainable external borrowing strategies. Above all, they need to reduce excessive dependence on one or two sources of foreign exchange, whether tourism, garments, remittances or commodity exports.

A neglected dimension of external resilience is regional economic integration. South Asia remains one of the least integrated regions in the world despite geographical proximity and complementary economic structures. Greater regional trade, improved transport connectivity, cross-border electricity markets, digital payment systems and investment partnerships could substantially reduce external vulnerabilities. A more integrated South Asian market would strengthen resilience by creating new sources of demand and reducing dependence on distant markets.

Recent geopolitical developments

Recent geopolitical developments also underline the importance of economic diplomacy. China's expanding economic engagement in South Asia through infrastructure financing and connectivity projects, India's renewed emphasis on neighbourhood cooperation, and the growing strategic interest of countries such as Japan, the United States and the European Union in the region are reshaping the external environment. South Asian economies will increasingly need to balance geopolitical considerations with sound macroeconomic management, ensuring that external borrowing remains sustainable and investments contribute to productive capacity rather than debt accumulation.

India occupies a pivotal position in this evolving landscape. As the region's largest economy, its external stability has implications beyond its own borders. Stable growth in India supports regional trade, investment and financial confidence. Conversely, any significant weakening of India's balance of payments would reverberate across South Asia. This places an additional responsibility on Indian policymakers to preserve macroeconomic stability while fostering regional economic cooperation.

Lesson for South Asia

The principal lesson from South Asia's recent experience is that balance-of-payments resilience cannot be built overnight. It is the cumulative outcome of decades of prudent policy, institutional development and structural transformation. 

India has benefited from economic reforms that broadened its export base, encouraged services, attracted foreign investment and built substantial foreign exchange reserves. These achievements should not lead to complacency. The country remains exposed to volatile oil prices, uncertain capital flows and an increasingly fragmented global economy.

(The writer is a retired Special Secretary, Government of India, and a commentator on financial, geoeconomic and regional issues. The views expressed are personal. He can be reached at ppmitra56@gmail.com.)