Foreign investors largely stayed off India in 2025, may do so in 2026 too

In 2025, India seemed to have lost its shine as a favoured foreign-investment destination. The 50 per cent US tariff adversely impacting exports to the country that generates the maximum trade surplus is not the only factor. The rupee's weakening and the deceleration seen in growth momentum are two others.

First, what the data related to foreign direct investments (FDIs) and foreign portfolio investors (FPIs) show. FDIs are long-term foreign investments in the real economy, while FPIs seek quick returns through investments in stock markets.

Net FDI in negative territory

Net FDI has been slowing down for the past few fiscals. After a rebound in the current fiscal, it has moved into a negative territory. It is not so much because of lower gross inflows but because of higher profit booking/disinvestment and repatriations, in addition to higher outbound investments by Indian investors.

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In FY25, the net FDI inflow dropped to $0.96 billion, while the gross FDI inflow was $80.6 billion. This was a massive drop of the net FDI inflow of $10.9 billion in FY24 and the previous peak of $43.9 billion in FY21.

During April-October of FY26, the net FDI inflow was $6.2 billion, while the gross FDI inflow was $58 billion. The net inflow in September and October (up to which data is available) are in negative — that is, repatriation and outward FDI overtook the inflows.

Profit-booking and repatriation picked up in April and continued as the US announced its trade policy, threatening all, including India, with high reciprocal tariffs. It imposed 25 per cent reciprocal tariff on India and then topped it up with another 25 per cent penalty tariff — both of which come into effect from August. Outward investment by Indian companies also continued, even as their domestic investments remained tepid.

The following graph maps these trends in the calendar year 2025 (up to December 24):

As for FPI, after a net inflow of USD 2.7 billion in FY25, it has gone into the negative territory with a net pullout of (-) USD 2.9 billion during April-December (up to December 24).

The following graph shows this development:

Both declining net FDI and negative net FPI are signs that foreign investors don’t see India as a favourable investment destination.

The weakening of investment sentiments is reflected in stock markets too.

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Both the major ones have grossly underperformed in 2025. The price return in the entire year is at about eight per cent for both Nifty50 and BSE Sensex, against double-digit average growth during the previous 5- and 10-year periods.

Devaluation of rupee

The rupee's devaluation hasn’t helped. In December, it crossed the psychological barrier of 90 per $1 multiple times. Given that the Reserve Bank of India (RBI) has decided to be less aggressive in defending the rupee to help the embattled exporters, it would add to the vulnerabilities of foreign investments. A weak rupee means lower returns.

The other factor that often pops up at such times is the overvaluation of Indian stocks, which is true but never talked about when Indian stock markets zoom, and FPI inflows continue. Nonetheless, Indian stocks remain very high as measured by profit-to-earnings (PE) ratio compared to its peers, emerging market, and also that of developed markets.

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Going by the global MSCI Index, a stock market benchmark, the current PE of Indian stocks (MSCI India Index) is 25.6x. This is way higher than emerging markets’ 16.4x (MSCI EM Index) and developed markets’ 24.4x (MSCI World Index). A high valuation points to lower chances of an upward swing — and a higher return.

The single biggest factor that attracts foreign investment remains potential earning that depends on growth momentum in an economy.

Here too, India is slipping.

Despite a more-than-expected bounce back to eight per cent GDP growth in H1 of FY26, the RBI expects growth to slow down in the second half of FY26 and also in FY27.

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The minutes of the Monetary Policy Committee (MPC) meeting, released a few days ago, quote RBI Governor Sanjay Malhotra saying that despite the higher growth, “weakness in some leading high-frequency indicators is suggestive of a deceleration in the growth momentum in H2 vis-à-vis H1”.

He adds, “Going forward in H1 next year, domestic growth is projected to remain strong, though moderate to 6.7-6.8 per cent.”

He wasn’t alone. Two other MPC members, Saugata Bhattacharya and Indranil Bhattacharyya, also expressed similar concerns and pointed to “deceleration” in growth momentum going forward.

Unless the deceleration is reversed, India would see more foreign investment fleeing its shores.