India’s gross foreign direct investment (FDI) inflows are strengthening to multi-year highs even as net FDI, a key measure for external stability, has fallen to near historic lows due to elevated profit repatriation by foreign firms and a surge in overseas investments by Indian companies, a report by Morgan Stanley said.
Gross FDI equity inflows are tracking at USD 90.8 billion on a 12-month trailing basis as of January 2026, equivalent to 2.3 per cent of GDP, up 13 per cent from a year earlier and close to the all-time high of USD 93.3 billion seen in mid-2021, the report said. By contrast, net FDI, after adjusting for repatriation and outward FDI, has dwindled to just USD 0.5 billion, or 0.01 per cent of GDP.
The divergence highlights a structural shift in India’s external financing pattern, where rising foreign investor interest coexists with larger profit outflows and growing global ambitions of domestic firms.
According to the report, repatriation by foreign companies has stayed above USD 50 billion for the second consecutive year, reaching USD 54.5 billion on a trailing basis in January 2026. At the same time, outward FDI by Indian firms has climbed sharply to USD 35.8 billion, more than doubling over two years.
“While the improving strength in gross FDI is encouraging, net FDI may remain weak in the near term due to higher repatriation and outward FDI,” the report said, warning that persistently weak net flows could increase reliance on more volatile portfolio capital and have implications for currency stability and external balance metrics.
India’s share in global FDI flows improved to 2.4 per cent in 2025, a three-year high, aided by a 44 per cent year-on-year acceleration in gross flows excluding repatriation. The country’s share of Asia’s FDI also rose by 200 basis points to 6.4 per cent.
The services sector continued to dominate FDI inflows with a 45.9 per cent share in 2025, supported by financial services, fintech and software. However, manufacturing FDI has diversified, particularly into electronics, autos, food processing and telecom hardware, aided by policy incentives and supply chain shifts.
Electronics and telecom hardware attracted large investments as global firms set up assembly and component manufacturing, while the automobile sector saw inflows into electric vehicles and auto components. Data centres have also emerged as a major opportunity, with India ranking seventh globally in data centre investments between January and September 2025.
The report noted that gross FDI has been supported by a mix of greenfield investments in IT and banking, and brownfield investments through higher stakes, joint ventures and mergers and acquisitions, particularly in the financial sector and startups.
However, the origin of FDI remains highly concentrated. The top 10 countries accounted for more than 91 per cent of total inflows in 2025. Singapore remained the largest source with a 36.7 per cent share, followed by the United States at 17 per cent and Mauritius at 11 per cent. Japan and the United Arab Emirates have also gained prominence in recent years.
FDI inflows are also geographically concentrated within India. Maharashtra has accounted for roughly one-third of flows over the past five years, while Karnataka saw the highest incremental inflows in 2025 at nearly USD 5.9 billion. These states are seen as offering more favourable regulatory and institutional environments.
On the global front, FDI flows reached USD 1.6 trillion in 2025, growing 14 per cent year-on-year, according to UNCTAD data cited in the report. However, flows to Asia declined by 2.5 per cent, and the improvement in global figures was partly driven by financial flows through conduit economies.
The outlook for 2026 remains cautious amid global volatility, geopolitical tensions and policy uncertainty, the report said, adding that FDI patterns are becoming more selective and concentrated.
The report also linked rising outward FDI to regulatory changes, particularly the development of family office and investment fund structures in GIFT City, which allow Indian wealth holders greater flexibility to invest globally under a favourable tax and regulatory regime.
Morgan Stanley said the trend in net FDI remains crucial for India’s basic balance, the sum of the current account and net FDI, as FDI is typically considered a stable source of financing. A sustained weakening could heighten dependence on non-FDI flows. |
