FDI Inflows Masking Outflows
India's foreign investment figures show a significant split: while gross Foreign Direct Investment (FDI) inflows remain robust, hitting $73.7 billion in the first nine months of FY26, net FDI has turned negative for six consecutive months through January 2026. This trend means more capital is leaving the country than entering. The primary drivers are a more than doubling of capital repatriations—which reached $4.92 billion in January 2026 alone—and steady outward investments by Indian companies. This divergence indicates a cautious approach by foreign investors, suggesting they are prioritizing immediate returns and de-risking over long-term commitments. The World Bank recorded net FDI outflows from India at $24.25 billion in 2024.
Shifting Investor Focus: Sectors and Destinations
Foreign investors are noticeably shifting their focus. Capital is rotating away from traditional technology investments towards the services and energy sectors. For instance, FDI in banking, a key service sector, plummeted by 87% from $898 million in FY23 to $115 million in FY25. The share of computer software and hardware in total inflows also fell significantly, from 44% in FY21 to 14% by FY25. Conversely, the broader services sector has become a major recipient, accounting for 19% of inflows. Non-conventional energy has grown substantially, representing over 8% of inflows in FY24, with FDI in renewable energy rising 50% year-over-year to $3.76 billion in FY24. Meanwhile, Indian companies are increasingly investing abroad, with key destinations including Singapore (30% of outflows in FY26), Mauritius (over 12% in FY26), and the UAE (11% in FY25).
Global Context, Valuation, and Competition
Globally, FDI flows have lagged GDP growth, with UNCTAD reporting an 11% decline in 2024 and a further 3% drop in early 2025. Europe and China saw steeper falls. While emerging markets have shown some resilience, India's net FDI performance reflects a decline in its global share from 2.9% to 2.4%. Some competitors, like China, have continued to attract inflows despite the global slowdown. Analysts point to India's high equity valuations—trading at roughly 22 times forward earnings compared to the MSCI emerging markets index at 13.6 times—as a potential deterrent for some long-term capital, despite strong macro fundamentals.
Macroeconomic Pressures and Currency Risks
Periods of global economic uncertainty and rising interest rates have historically led to increased capital repatriation. The current trend of rising repatriations has been ongoing for at least 13 months. Higher global interest rates increase the cost of capital, making foreign investments less economically appealing. Geopolitical tensions and high crude oil prices also contribute to currency depreciation and investor caution. The Indian rupee faces pressure, with forecasts suggesting the USD/INR could reach 94 by mid-2026. While a weaker rupee can boost rupee-denominated earnings for export sectors like IT, it also raises import costs and inflation risks.
Analyst Views and Sector Outlooks
Analysts hold mixed views on the immediate future of foreign capital flows. Some anticipate a gradual return of foreign investors in 2026, driven by India's resilient economic fundamentals and potentially attractive valuations. However, others caution that geopolitical risks, currency volatility, and sector-specific concerns, particularly in technology, could prolong the current cautious stance. While the IT sector faces challenges from generative AI and high valuations, the renewable energy sector remains a bright spot due to strong government support and the clean energy transition. The government aims to attract new investors while retaining existing ones amidst rising repatriations, making efforts to foster reinvestment crucial for sustained growth.