Foreign Capital Avoids India Despite Strong Growth – S&P-Crisil

Foreign Investment Trends in India: A Mixed Bag Amid Growth

Despite robust economic growth, foreign capital inflows into India have significantly declined, raising concerns about investor confidence.

Declining Foreign Portfolio Inflows

The S&P-Crisil report reveals that net foreign portfolio inflows into India plummeted by 16.6% in FY26, despite the economy’s strong growth trajectory. This decline is particularly alarming as it occurred during a period when the Indian economy was projected to grow robustly. Foreign portfolio investors (FPIs) have been net sellers of Indian equities for three consecutive months, from April to July 2026, indicating a lack of confidence in the market.

Impact on the Rupee and Current Account Deficit

The report highlights that the capital inflows were insufficient to cover a current account deficit of 0.6% of GDP, leading to a sharp depreciation of the Indian rupee. This situation underscores the vulnerability of the Indian economy to external shocks and the importance of foreign investment in stabilizing the currency. The decline in foreign capital raises questions about the sustainability of India’s growth, especially in light of the current account deficit.

Foreign Direct Investment Dynamics

Gross foreign direct investment (FDI) in India reached $94.5 billion in FY26; however, net inflows were significantly lower at $7.8 billion. This discrepancy is attributed to substantial repatriation by foreign investors and outward investments by Indian companies, with the Reserve Bank of India reporting repatriation and disinvestment totaling $53.58 billion. Such trends indicate a cautious approach by foreign investors, who may be reassessing their commitments in the Indian market.

Emerging Sectors and Future Growth Potential

Despite the current challenges, the report forecasts that the share of emerging sectors in industrial investment is expected to rise from 12% to 25-27% over the next five years. Sectors such as defence, data centres, solar energy, batteries, and semiconductors are poised for growth. However, localizing the clean-technology supply chain could require an investment of $40-50 billion by 2035, highlighting both the potential and the challenges ahead for foreign investors.

Performance of Active Indian Funds

S&P’s SPIVA data indicates that over 70% of active Indian funds have underperformed their benchmarks over the past decade. This underperformance may further deter foreign investors, who typically seek robust returns and may be wary of investing in funds that do not deliver competitive performance.

Key Highlights

• Net foreign portfolio inflows declined by 16.6% in FY26.
• Foreign investors sold Indian equities for three consecutive months.
• The current account deficit reached 0.6% of GDP, impacting the rupee.
• Gross FDI was $94.5 billion, but net inflows were only $7.8 billion.
• Emerging sectors are expected to increase their share in industrial investment to 25-27%.
• Over 70% of active Indian funds lagged their benchmarks over the past decade.

Investor Note: The decline in foreign capital inflows raises concerns about investor confidence in India’s economic stability. Investors should closely monitor the evolving landscape, particularly in emerging sectors, while being cautious of the broader implications for currency stability and market performance.