India delivers, but FDI disappoints: Foreign inflows hit 20-year low of $4.5 bn in FY25

India recorded its lowest foreign direct investment (FDI) inflows in two decades in FY25, with total foreign flows slipping to $4.5 billion. This sharp decline was registered even after India delivered on key macroeconomic and structural metrics, including robust GDP growth, fiscal discipline, and reform continuity.

“India was expected to receive hundreds of billions of dollars in foreign flows. Despite delivering on all key metrics, these flows have remained elusive—and, in fact, have reversed. India recorded its lowest FDI inflows in FY25. Total foreign flows in FY25 amounted to just $4.5 billion, the lowest level in the past 20 years,” DSP Mutual Fund said in its July 2025 Netra report.

The decline in FDI was partly attributed to the broader reversal in global capital flows. Global foreign investment has dropped sharply from the “exuberant highs” of the 2000s and is now below levels seen at the start of the 21st century, the report noted.

“If and when global flows rebound—and if India continues to maintain macroeconomic stability along with strong microeconomic delivery—these flows could return. For now, however, they remain a cause for concern,” it highlighted.

According to the report, a weak U.S. dollar flow remains a key driver of poor foreign flows. While a weaker U.S. dollar has temporarily eased financial conditions in emerging markets (EMs) like India, despite high U.S. interest rates, this dynamic is self-limiting.

A weaker dollar paired with high U.S. interest rates will eventually reduce the American current account deficit (CAD) by dampening domestic demand and boosting exports, which in turn could stabilise or strengthen the dollar.

Simultaneously, as global central banks diverge from the U.S. Federal Reserve and begin cutting rates, rate differentials will narrow, potentially making U.S. bonds more attractive again, which could pull capital away from emerging markets (EMs) like India.

“For now, EMs like India are leveraging this window to ease monetary policy, but the sustainability of this trend hinges on future shifts in the USD, CAD, and Fed policy,” DSP Mutual Fund said in its report.

“This also indicates why EMs will find it hard to have growth levers as their biggest consumer, the US, deleverages,” it added.

According to the Reserve Bank of India’s June bulletin, gross inward FDI stood at $8.8 billion in April 2025, up from $5.9 billion in March 2025 and $7.2 billion in April 2024. Nearly half of the April inflows came from the manufacturing and business services sectors. On a yearly basis, gross FDI increased from $71.3 billion in 2023–24 to $81.0 billion in 2024–25. The steady flow of investments indicates that India continues to be viewed as a favourable destination for long-term capital, particularly in sectors such as manufacturing, services, and infrastructure.

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