India’s capital flows outlook brightens as FDI holds firm, RBI says

India’s external financing outlook is expected to improve as strong foreign direct investment and easing outflows support overall capital flows, even as portfolio investments continue to respond to shifting global return expectations, Reserve Bank of India officials said.

Governor Sanjay Malhotra said foreign portfolio investment is inherently volatile and tends to follow short-term opportunities across markets rather than remain anchored to any one economy.

FPI flows are guided by return considerations and move across geographies depending on where opportunities emerge, Malhotra said, noting that such flows typically operate on a shorter time horizon compared with direct investment.

The central bank, however, expressed greater confidence in the trajectory of direct investment, citing robust gross inflows and expectations that net figures will improve as repatriation pressures ease.

Gross FDI has expanded by around 18%–20% so far this year to about $18 billion, with officials indicating that inflows could approach $100 billion next year. Outflows linked to repatriation, which had previously compressed net FDI, are expected to slow following a correction in equity valuations.

Repatriation outflows should moderate, and outward direct investment may remain contained, Malhotra said, suggesting that net FDI could strengthen as these factors stabilise.

External position

Deputy Governor Poonam Gupta said India’s investment appeal could improve further, supported by more attractive valuations, exchange rate movements and favourable nominal growth prospects.

She noted that high valuations in the previous year had led to sizeable repatriation of IPO proceeds, contributing to capital outflows and currency pressure. With valuations now more moderate, such outflows are unlikely to recur at the same scale, offering support to the capital account.

The RBI reiterated that India’s external buffers remain strong, with foreign exchange reserves covering around 11 months of imports, comfortably above standard adequacy thresholds.

Officials said both the current and capital accounts are expected to strengthen, aided by policy initiatives, trade agreements with major economies, and ongoing efforts to boost domestic manufacturing and exports.

Malhotra said that while recent global developments, including higher oil prices, have created some pressure on the balance of payments, the underlying macroeconomic fundamentals remain intact.

Over time, both portfolio and direct investment flows should align with India’s growth trajectory, he said, adding that long-term investors are likely to remain engaged even as short-term flows fluctuate with market conditions.

The central bank also highlighted structural initiatives aimed at reducing external vulnerabilities, including efforts to lower energy import dependence through increased domestic production, expansion of renewable energy and wider adoption of electric vehicles.

Officials said these measures, alongside continued reforms and trade integration, should reinforce India’s external stability over the medium term despite ongoing global uncertainty.