By Amal Krishnan
The FY25 data on Overseas direct investments from India revealed a sharp uptick in the outflow of investments by Indian firms. The net outward FDI in FY25 was around $30 billion, up from $16 billion in the previous year. The sharp fall in net FDI for FY25, was primarily due to a rise in repatriation of investments and overseas investments by Indian firms. The recent development, coupled with volatility in FII activity, need to be closely watched. The data from the RBI shows that the overseas direct investments from India increased by around 50 percent to $35 billion in the first 11 months of FY25 compared to the $22 billion recorded in FY24. March alone witnessed financial commitments worth $5 billion, a 20 percent rise from the previous year. Can the increased outflows be interpreted as the growing appetite of Indian firms to expand their operations abroad? Or was it just a one-off year? The data needs to be closely studied.
Over the years, India’s overseas direct investments have been marked by certain peculiar characteristics. Primarily, the offshore financial centers (OFCs) received the lion’s share of India’s OFDI flows. Around 50% of the OFDI went to such destinations, with Singapore receiving around 24% of the outflows in FY25. Other top destinations included the Netherlands, the U.S, UAE, the U.K, and Mauritius. The countries receiving Indian OFDI have not significantly varied from the previous years. Interestingly, India has witnessed rising flow of investments to non-offshore financial centres in the years between 2020 and 2025. Since 2021, the financial commitment to non-OFC destinations has either surpassed or have been nearly equal to the flows to OFC destinations. Further, a rising interest can be seen in Indian firms to invest in developed countries in the post-pandemic years. Another interesting observation, which is significantly different from the previous years, is firms’ rising interest in investing in the GIFT city. The GIFT city received nearly $800 million in the said period.
Further, India’s OFDI footprint has expanded into more destinations, especially in the post-pandemic period. The next major aspect of India’s OFDI flows is the increasing share of services over the past decade. Around 60 percent of the flows between FY21 and FY25 were contributed by services firms. The share of manufacturing has been on a downtrend for several years, with the contribution standing at 21 percent in the said period. Another eye-catching development in FY25 was the increase in the number of transactions exceeding $100 million. Multi-million dollar deals by L&T, Bharat PetroResources, Vedanta, etc have contributed significantly to the overseas investments. India’s OFDI has always attracted criticism for being granular in nature. A concerning trend is the domination of the debt route, which includes loans and guarantees issued, in India Inc.’s overseas investments. The post-pandemic period has continued the historical pattern of the debt route dominating India’s OFDI flows for the last two decades. Whether this trend will be sustained into the future is something to be watch out for.
The sharp decline in net FDI does not seem to be a point of worry now, given that gross FDI inflows remained strong. The rising overseas investments from India in recent times align with the global trend where emerging market economies are contributing significantly to global outflows. The 2025 World Investment Report points out that seven Asian economies figure in the top 20 contributors to global outflow of investments. Economists are divided, as in most-cases, on whether overseas investments by developing economies can have negative implications for the domestic economy.
The RBI governor was upbeat on the global expansion of Indian firms. Although India faces a challenge in identifying genuine overseas investments, restricting India’s overseas investments would prove detrimental to India’s aspirations of being a global economic powerhouse. In this age where global value chains dominate trade, overseas investments enable Indian firms to link themselves to these production chains firmly. Instead, it would be prudent for the RBI to focus on dealing with the volatile short-term flows. Further, policymakers must turn their attention to encourage retention of profits within the economy to develop a self-sustaining mechanism. An exercise to rework the definition of FDI in India needs to be undertaken to identify investments with long-term horizon. The present definition of FDI looks obsolete. The central bank needs to strike a balance between encouraging overseas investments and dealing with speculative flows. A concerted effort from the RBI and the government is required in this regard.
(Amal Krishnan is an Assistant Professor, Dept of Professional Studies, Christ University, Bengaluru. Badri Narayanan Gopalakrishnan is a Fellow, NITI Aayog. Views are personal)
Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.