Underlying Causes of the Historic Low in FDI and Experts Forecasting an Imminent Rebound

India’s Net FDI Sees Dramatic 96% Decline to $0.4 Billion in FY25

India’s net foreign direct investment (FDI) took a staggering plunge of 96% to $0.4 billion in FY25, a stark decline from $10.1 billion the prior year. This downturn occurred despite a noticeable increase in gross inflows. Analysts suggest that this trend is linked to profit booking, escalating outbound investments, and the normal progression of market cycles—interpreting it as evidence of economic maturation rather than a cause for alarm.

While delving into the reasons behind this substantial 96% dip in net FDI, experts highlight that it does not indicate a worrisome trend regarding investor departure, but rather reveals capital expansion initiatives. The Reserve Bank of India (RBI) has positively acknowledged this FDI landscape, stating in its monthly bulletin, “This scenario exemplifies a mature market where foreign investors can operate with agility, positively impacting the Indian economy.”

Gross FDI Inflows Remain Robust

Despite the sharp drop in net FDI, total gross inflows into India increased significantly, rising to $81 billion in FY25 from $71.3 billion in FY24—an impressive growth of approximately 13.6% and the highest figure in three years. Arvind Kothari, founder of Niveshaay and smallcase manager, explained, “This is an encouraging development, indicating that India remains a sought-after location for foreign investment, even in the face of global challenges such as elevated interest rates, geopolitical conflicts, and cautious capital allocation. It showcases the persistent faith of global capital in India’s long-term economic prospects and structural growth potential.”

Key Reasons for the Sharp FDI Decline

1. Increase in Repatriations and Outbound Investments

The sharp drop in net FDI in India can be largely attributed to a rise in fund repatriations by foreign investors alongside increased outbound investments by Indian businesses. While India recorded $75.1 billion in gross FDI inflows during the period from April to February 2024–25, reflecting an uptick from $65.2 billion a year prior, the net figure fell due to heightened outward flows. Notably, India’s net outward FDI surged to $29.2 billion in 2024–25, representing more than a 75% increase compared to the previous year. Kothari noted, “This decline is not indicative of waning investor interest, but rather signifies two significant shifts: a round of profit-booking by international investors following notable IPO exits, and a substantial expansion of outward FDI by Indian companies eager for global opportunities.” He sees both profit-taking and IPO-linked exits as normal phenomena in maturing markets.

2. Global Economic Uncertainty Affecting Sentiment

Compounding these challenges is the increasingly uncertain global economic landscape. Rising trade tensions, particularly following the United States’ imposition of significant tariffs in April 2025, have shaken investor confidence. The International Monetary Fund (IMF) has adjusted global GDP growth projections downwards to 2.8% for 2025 and 3.0% for 2026, attributing the revisions to slowdowns impacting both advanced and emerging economies, including significant reductions for the US, China, ASEAN nations, and Latin America.

3. Diminished Global Demand Impacting Export Sectors

The decline in global demand has critically influenced the attractiveness of India’s export-driven sectors to investors. According to the S&P Global Manufacturing PMI, April 2025 witnessed the most significant export downturn since 2012, excluding pandemic years. China’s PMI reported contraction, and US GDP showed a decrease in Q1 as businesses preemptively increased imports to mitigate tariff risks. Rising concerns about a more protectionist global environment have led many multinational companies to withhold profit forecasts, reflecting considerable uncertainty and a tendency to defer capital investments abroad.

4. Geopolitical Tensions Heightening Investor Wariness

Geopolitical unrest has further contributed to a cautious outlook among investors. Escalating tensions in the Middle East, coupled with deepening trade disputes among major global economies, have resulted in a more reserved approach from international investors. India’s brief resurgence of tensions with Pakistan in early 2025 also added to domestic market volatility, further dampening investor confidence in the short term.

5. Maturing Investment Cycle Leading to Lower Net Inflows

Another contributing factor to the decline in FDI is the maturing investment cycle across various sectors within the Indian economy. Many previous FDI inflows are now reaching the harvest phase, where foreign firms reduce their investments upon achieving their growth and profit milestones. This natural progression in long-term investments leads to diminished net FDI even when gross inflows remain relatively robust.

Experts Remain Optimistic About FDI Potential

Despite these challenges, experts maintain that “the downturn in net FDI is a temporary result of capital rotation rather than a fundamental weakness.” Kothari expressed optimism, stating, “This FDI cycle presents substantial opportunities for India’s small and mid-cap enterprises. India continues to attract significant foreign investment across various sectors, including manufacturing, digital technologies, and infrastructure. As multinational companies bolster their supply chain presence in India, sectors such as electronics, capital goods, pharmaceuticals, and auto ancillaries stand to benefit. These companies are likely to become preferred vendors, joint venture partners, or attractive acquisition targets, supported by Production-Linked Incentive (PLI) schemes and competitive cost structures.”