Whalesbook
India Seeks Stable Investment as FPIs Exit, Rupee Weakens
India is navigating an economic shift driven by a large withdrawal of foreign portfolio investment (FPI). In 2025, foreign investors sold $18.4 billion in Indian equities. This trend continued into early 2026, with outflows exceeding $2.5 billion by mid-January. This selling pressure has weakened the Indian rupee by nearly 5% over 2025, pushing it towards the 90-per-dollar mark for the first time. Analysts now expect the rupee to trade between 90 and 93 by early 2026. Coupled with a widening current account deficit that reached $13.2 billion in the last quarter of 2025, these outflows are straining India's balance of payments. Factors contributing to the exits include currency volatility, global trade tensions, potential US tariffs, and high domestic market valuations, alongside rising US bond yields.
In response, India's finance ministry is deliberately shifting its focus to attract 'patient capital.' This means prioritizing stable foreign direct investment (FDI) and long-term debt instruments over the more volatile FPI segment. FDI inflows showed resilience, reaching $81.04 billion in the fiscal year 2024-25, a 14% increase from the prior year, with the services sector leading the growth. The government is streamlining regulations and forming committees to help direct long-term capital from domestic sources like insurers and pension funds into major infrastructure projects. This strategic pivot aims to build a more stable foundation for economic growth, shield the economy from global market swings, and strengthen foreign exchange reserves, which stood at $701.36 billion by mid-January 2026.
Global Currents and India's Domestic Strength
India's push to attract stable capital comes as emerging markets worldwide face turbulent capital flows. These flows are increasingly driven by nonbank investors such as hedge funds, which tend to react quickly to shifts in global risk sentiment. Geopolitical tensions, particularly the conflict in the Middle East, have amplified these risks, leading to capital outflows from several emerging markets. Trade policy uncertainties, including US tariff disputes, also cast a shadow, impacting export competitiveness and investor confidence. Despite these challenges, India's economic outlook remains relatively strong. The UN projects Gross Domestic Product growth at 6.4% for 2026, while Goldman Sachs forecasts a higher 6.9% for the same year, citing robust domestic demand and supportive policies. A key factor is the growing capacity of domestic investors, including mutual funds and retail buyers, to absorb foreign portfolio investor outflows—a phenomenon dubbed 'India buys India.' Historically, India has managed such FPI volatility by relying on domestic inflows and policy reforms to boost FDI, accumulating over $1.14 trillion since April 2000.
Ongoing Risks to Investment
Despite positive growth forecasts and the strategic shift to patient capital, significant risks persist. The success of India's strategy hinges on its ability to consistently attract foreign direct investment and long-term capital in a competitive global market. While the regulatory environment is improving, hurdles remain. Past instances of policy uncertainty or coordination issues between government bodies have slowed the realization of actual investments. Relying on FDI inflows to finance a growing current account deficit (projected at 1.5% of GDP for fiscal year 2026/27) leaves the economy vulnerable to external shocks. The volatility of nonbank capital flows in emerging markets means that even stable FDI could be overshadowed by sudden portfolio exits, further pressuring the rupee and foreign exchange reserves. Elevated market valuations in certain sectors, combined with mixed earnings reports, could prompt more profit-taking by foreign investors, particularly if global uncertainties intensify or a US-India trade deal falters. The government's plan to direct domestic insurance and pension funds into infrastructure faces hurdles such as finding sufficient suitable projects, ensuring adequate risk appetite, and establishing efficient regulatory frameworks for deployment.
Outlook for Sustainable Growth
India is projected to remain one of the world's fastest-growing major economies, with forecasts for 2026 ranging between 6.4% and 6.9%. The government's strategic pivot to patient capital, supported by ongoing policy reforms and the strength of domestic financial markets, is designed to foster long-term stability. However, the path ahead requires navigating persistent global economic uncertainties, including geopolitical risks and shifts in monetary policy. Successfully attracting and retaining stable foreign investment, while managing the inherent volatilities of global capital markets, will be crucial for sustaining India's growth trajectory and ensuring currency stability.