Foreign inflows have long powered India’s economic growth. But that engine is now sputtering. In 2025 alone, India saw nearly $17 billion in foreign portfolio outflows, raising alarm among policymakers. This steady withdrawal of capital threatens both the growth trajectory and the credibility of the financial system. The government’s response has been to accelerate financial sector reforms — but the key question remains: will these measures convince global investors that India is truly open for business?
The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) are preparing a series of liberalising steps. These include faster routes for market listings, simpler entry for foreign funds and overseas lenders, and relaxed norms for corporate borrowing and bank-financed mergers. Some reforms are already in place. Banks can now lend more against listed securities, and non-bank lenders face lower capital-buffer requirements.
READ | Transgender rights in India: From recognition to reform
SEBI is also broadening participation by bringing small investors from tier-II and tier-III cities into the equity market — a move aimed at reducing over-dependence on foreign portfolio investors (FPIs).
Beyond incremental tweaks
Seasoned investors remain cautious. They argue that reforms must go beyond small regulatory changes. Unless India’s earnings outlook improves and the policy approach inspires trust, tweaks alone won’t reverse sentiment. The government must first understand why investors hesitate. Analysts cite weak corporate earnings, high valuations, global trade uncertainty from US tariffs, and a less attractive risk-reward profile compared with other emerging markets.
India still boasts one of the fastest-growing large economies, with real GDP growth of 6.8 per cent projected for FY 2025-26. Yet, according to NSDL data, foreign institutional investors have sold over ₹1.5 lakh crore of Indian equities this year — the highest annual outflow on record.
While foreign portfolio flows grab headlines, the quieter story is about foreign direct investment (FDI) — the kind of capital that builds factories, logistics chains, and jobs. India’s FDI inflows have stagnated at around $70 billion annually since 2022, despite large headline projects. That stagnation suggests not just cyclical hesitation but structural bottlenecks: complex land rules, inconsistent tax enforcement, and uncertain dispute resolution. Without a clear FDI revival, portfolio volatility will keep unsettling the market. The test for policymakers is whether the next phase of reforms can improve India’s investment climate, not merely its capital-market plumbing.
Policy credibility and leadership transition
Policy credibility will now matter as much as liberalisation. Both financial regulators have new leadership: Sanjay Malhotra took charge as RBI governor in December, and Tuhin Kanta Pandey became SEBI chairperson in March. Their reform-friendly reputations raise expectations, but investors will look for consistency, transparency, and follow-through.
India’s financial ecosystem has often functioned like a “walled garden.” The challenge is not just to attract foreign capital, but to compete effectively for it. According to the Bank for International Settlements (BIS), India must enhance both the quantity and quality of investor engagement. While equity inflows briefly returned in mid-2025, debt markets continue to see outflows, reflecting deeper concerns over capital accessibility and repatriation norms.
Persistent FPI outflows carry direct consequences for macroeconomic stability. The rupee has remained relatively steady only because of active RBI intervention, which in turn depletes foreign-exchange reserves. Meanwhile, higher US yields have widened the spread between Indian and American bonds, deterring global funds from holding Indian debt. A prolonged outflow phase could push borrowing costs higher and tighten liquidity. The central bank, therefore, faces a twin challenge — maintaining currency stability without undermining growth through tighter money.
Financial sector reforms
For reforms to resonate, outcomes must be visible. If banks are allowed to finance mergers more freely, a major foreign-backed deal should follow. If faster listing routes are promised, successful mid-cap IPOs with foreign anchors must demonstrate credibility. Investor confidence will strengthen not through rulebooks but through tangible results.
Reforms must also align with stronger corporate earnings, cleaner balance sheets, and easier business processes. Regulatory easing alone cannot offset structural issues. Unless credit growth, earnings, and valuations find equilibrium, foreign investors may continue to sit out.
Globally, India is not alone in struggling to retain foreign capital. Countries like Vietnam, Indonesia, and Mexico have drawn steady inflows by simplifying tax codes and offering predictable policy regimes. India’s regulatory reforms are deeper, but their implementation is slower. In contrast, Southeast Asian economies are selling themselves as stable supply-chain destinations amid China’s slowdown. For investors comparing emerging markets, India’s advantage in scale and growth must now be matched by the ease of capital movement and policy predictability — where the gap still shows.
Repatriation, governance, and domestic depth
Investor comfort depends on more than entry. It also hinges on ease of exit, stable governance, and protection of shareholder rights. Clear repatriation rules and predictable regulation will reassure long-term investors. Integrating global best practices in market regulation will signal that India is committed to stability and fairness.
SEBI’s effort to deepen domestic participation deserves credit. A stronger base of domestic institutional investors (DIIs) will cushion volatility when FPIs withdraw. As household savings flow into equities and mutual funds, India’s markets will become more resilient to foreign mood swings.
Finally, investor confidence depends as much on fiscal discipline as on regulatory intent. India’s public debt remains high, and delays in disinvestment have reduced fiscal flexibility. A credible medium-term fiscal plan and a transparent tax regime would complement RBI and SEBI’s market reforms. Without macroeconomic coherence — between the finance ministry’s spending, the RBI’s rate policy, and regulatory oversight — India risks sending mixed signals. A strong fiscal narrative, along with credible implementation, would reassure investors that reforms are not just tactical responses to capital flight but part of a durable economic strategy.
India’s growth story remains strong, but investors compare returns and reforms across emerging markets. To stand out, India must combine high growth with ease of investment, enforceable rights, and credible execution. The government and regulators have made a promising start, but their success will be measured not by announcements — but by whether capital flows return and stay.