India’s endeavour to promote itself as a hub for long-term foreign investment and an alternative to other magnets like China has been taking a knock. The inflow of foreign direct investment (FDI) has been lower than the outflows, keeping net FDI in the red for 5 months in a row. The net outflow for January widened to $1.39 billion, compared to $492 million in the previous month. While the inflows in January remained stable at $5.67 billion, repatriation of profits and disinvestment by foreign firms grew sharply to $4.92 billion. Outbound investments of $2.14 billion by Indian companies added to the exit stream. For the 10 months from April 2025 to January 2026, net FDI fell by almost a quarter to $1.65 billion from the same period in the previous year.
The expanding war has made foreign investors even more risk-averse, slowing investments in emerging markets like India. It also speaks volumes that wealthy Indians are finding opportunities abroad more attractive than putting money in expanding their businesses or investing at home. The higher US bond rates and stronger dollar are aiding this flow in the other direction.
It’s not just FDI, which is seen as a longer-term investment, that is suffering. The more fickle foreign portfolio investments (FPIs), too, recorded a net outflow of $3.2 billion in January, though it was lower than December’s net outflow of $4.2 billion. If the negative net FPI till January reflected the investor perception that our stocks are overvalued, the Gulf war widened the net outflow, with the cumulative number for the year till March 25 shooting up to $12.5 billion.
One of the biggest challenges it’s posing is the pressure on the rupee, which closed at yet another historic low of 94.05 against the dollar on Wednesday. The fast-rising oil and gas import bill is not helping either. While turning around the FDI outlook depends on longer-term improvements in tax competitiveness, policy predictability and business environment, there are those in the market now looking for near-term solutions. The sentiment is turning from one expecting interest rate continuity to looking for rate increases by a quantum sufficient enough to attract capital. The tools in hand are few, but the need to use them is being felt more acutely as the war makes a worrying situation grimmer.