India’s foreign direct investment (FDI) dipped to $0.4 billion in FY25 from $10.1 billion a year earlier. What is the reason behind this sharp 96 per cent decline, and why are experts not concerned about it?
The RBI views this FDI inflow positively, stating in its monthly bulletin, “This is a sign of a mature market where foreign investors can enter and exit smoothly, which reflects positively on the Indian economy.”
Experts also see it in a positive light, stating that gross FDI inflows have significantly risen from the previous year. Arvind Kothari, smallcase Manager and Founder at Niveshaay, said, “According to the RBI, gross FDI inflows rose to $81 billion in FY25, up from $71.3 billion in FY24—a growth of approximately 13.6 per cent, and the highest in the past three years. This is an encouraging sign that India continues to be a favored destination for foreign investors, despite global headwinds like high interest rates, geopolitical tensions, and cautious capital deployment. It reflects the enduring confidence of global capital in India’s long-term economic trajectory and structural growth potential.”
Here are the 5 key reasons why India’s FDI fell sharply
1. Rising repatriations and outward indian investment
One of the major reasons behind the steep fall in India’s net FDI has been the sharp rise in repatriation of funds by foreign investors and an increase in outward investments by Indian companies.
While India attracted $75.1 billion in gross FDI inflows during April–February 2024–25, an increase from $65.2 billion the previous year, the net figure declined due to the rise in outward flows. India’s net outward FDI reached $29.2 billion in 2024–25, marking a growth of more than 75 per cent over the previous year.
While talking about the reason for the decline, Kothari said, “The decline is not due to a lack of investor interest but rather reflects two key shifts: a wave of profit-booking by global investors amid big-ticket IPO exits, and a sharp rise in outward FDI by Indian firms, which jumped to $29.2 billion, as domestic companies increasingly seek global growth opportunities.” Kothari views both IPO-linked exits and profit-taking as natural events in maturing markets.
2. Global economic uncertainty dampening sentiment
Adding to the pressure, the global economic environment has become increasingly uncertain. Rising trade tensions, particularly after the United States imposed sweeping tariff hikes in April 2025, have rattled investor confidence.
The International Monetary Fund (IMF) has revised global GDP growth forecasts downward to 2.8 per cent for 2025 and 3.0 per cent for 2026, citing slowdowns across both advanced and emerging economies. These include substantial cuts for the US, China, ASEAN countries, and Latin America.
3. Weak global demand hurting export-oriented sectors
Weakening global demand has also played a critical role. Export-oriented sectors in India have become less attractive to investors due to sluggish international trade. According to the S&P Global Manufacturing PMI, April 2025 marked the steepest export decline since 2012, excluding the pandemic years.
China’s PMI contracted, and the US GDP shrank in the first quarter as companies front-loaded imports to hedge against tariff risks. As fears of a more protectionist global environment grows, many multinational firms have withheld profit forecasts, reflecting deep uncertainty and a tendency to hold back on capital expenditure in foreign territories.
4. Geopolitical tensions, India-Pak conflict fueling investor caution
Geopolitical instability has further dampened investor sentiment. Escalating tensions in the Middle East, alongside intensifying trade friction among global superpowers, have contributed to a more cautious approach from international investors.
India’s own brief episode of renewed tensions with Pakistan in early 2025 added to domestic market volatility, which further affected investor confidence in the short term.
5. Maturing investment cycle reduces net inflows
Another factor behind the fall in FDI is the maturing investment cycle in many sectors of the Indian economy. Several earlier FDI inflows are now entering the harvest phase, where foreign companies begin withdrawing parts of their investments after achieving their growth and profitability targets. This natural evolution of long-term investments leads to a reduction in net FDI, even when gross inflows remain relatively healthy.
Experts believe FDI cycle holds strong potential
Experts believe “the drop in net FDI is a transitory outcome of capital rotation—not a structural weakness.”
Kothari showed his optimism and said, “This FDI cycle holds strong potential for India’s small and mid-cap companies. India continues to attract large-scale foreign investment across manufacturing, digital, and infrastructure sectors. As global firms deepen their supply chain presence in India, sectors like electronics, capital goods, pharmaceuticals, and auto ancillaries are likely to benefit. These firms stand to emerge as preferred vendors, JV partners, or acquisition targets, aided by PLI schemes and cost competitiveness.”