Foreign investment outflows have become a growing concern for India in recent years. Although the country has strong economic fundamentals and is often described as one of the most attractive destinations for global capital, investors have increasingly been pulling money out of Indian markets. The situation raises a critical question: can the efforts of the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) successfully reverse this trend?
The data for the financial year 2024–25 highlights the scale of the challenge. Gross foreign direct investment (FDI) inflows rose by 14 percent to $81.04 billion compared to $71.28 billion in the previous year. This indicates that India continues to attract strong interest from foreign investors at a gross level.
However, the problem lies in net FDI. After accounting for repatriation, divestment, and outward investment by Indian firms, net FDI collapsed to just $353 million in FY 2025. This was a steep decline of about 96.5 percent compared to the previous year, making it the lowest on record. The sharp fall in net inflows highlights that while money is coming in, it is also leaving the country at almost the same pace.
Portfolio flows have also shown weakness. In September 2025, foreign portfolio investors (FPIs) pulled out 7,945 crore rupees from Indian equities. This pushed the total net FPI outflow for the year to around 1.38 lakh crore rupees, which equals about $16 to $17 billion. On the debt side, foreign investors also withdrew about 2,766 crore rupees in June 2025 after the RBI cut policy rates by 50 basis points. The move narrowed the spread between Indian bonds and US bonds, making Indian debt less attractive.
Several factors explain why investors are pulling money out of India despite healthy gross inflows.
One key reason is large-scale exits through initial public offerings. Global funds have used high valuations in companies such as Hyundai and Swiggy to book profits and exit. These repatriations have hit net inflows sharply.
Another factor is the rising outward investment by Indian companies themselves. Net outward FDI jumped to about $30 billion in FY 2025 compared to $16 billion in FY 2024. In April 2025 alone, Indian companies committed $6.8 billion overseas, showing that domestic businesses are increasingly expanding abroad.
Global interest rates also play an important role. With US rates remaining high, investors find safer or better-yielding options abroad. This is why bond markets in India witnessed outflows after the RBI cut rates, as investors could get more attractive yields elsewhere.
Regulatory frictions add to the problem. Investors often face long registration timelines, complicated documentation, and compliance burdens related to KYC and anti-money laundering checks. Coordination issues between SEBI and RBI sometimes make the process slower and more expensive.
Finally, broader policy uncertainties and global geopolitical tensions create caution among investors. Any unexpected changes in disclosure rules, taxes, or other regulations also reduce confidence and make investors nervous about long-term commitments.
In response to these concerns, both SEBI and RBI have taken several steps aimed at improving the ease of doing business for foreign investors and attracting new inflows.
One of the major reforms has been the plan to cut down the FPI registration process from nearly six months to just 30–60 days. This would make India’s system more comparable to global standards.
SEBI has also eased compliance for FPIs that invest only in government securities. These investors are now exempt from certain disclosure and investor group requirements. The board has also relaxed KYC norms and reporting timelines for these funds to attract more money into India’s sovereign debt market.
RBI has increased FPI limits in corporate debt markets to 8.22 lakh crore rupees for the first half of FY 2025–26 and has plans to raise the limit further to 8.80 lakh crore rupees in the second half. Discussions are also ongoing to double the individual foreign investor limit in listed companies from 5 percent to 10 percent and to raise the combined foreign individual holding limit to 24 percent.
A new framework introduced in November 2024 allows FPIs that exceed the 10 percent ownership threshold to either divest or be reclassified as FDI, giving them more flexibility. SEBI is also considering the launch of an “automatic window” for FPI entry, which would further streamline the process. At the same time, efforts are being made to align documentation and account-opening rules between RBI and SEBI to eliminate duplication and reduce friction.
While these measures show intent and are likely to improve sentiment, it is important to note that structural challenges remain.
The sharp fall in net inflows may partly reflect the maturity of the Indian market. Global investors expect to enter and exit easily, and any move to restrict exits could backfire by discouraging long-term investment.
Another limitation is the global interest rate environment. As long as US rates remain high, global capital will naturally flow toward those markets, regardless of domestic reforms.
Consistency and predictability of regulations also matter. Past surprises in rules have weakened trust, so investors need assurance that policy will remain stable over the long term. Furthermore, regulation alone cannot substitute for real economic returns. If corporate earnings growth weakens or valuations appear stretched, investors will still be cautious.
Monitoring risks is another challenge. As foreign participation increases, India needs strong systems to manage sudden reversals and ensure financial stability. Coordination among SEBI, RBI, and the Ministry of Finance will be critical to maintaining credibility and avoiding mixed signals.
The steps taken by SEBI and RBI may not completely reverse outflows, but they can certainly reduce the pace of exits and create conditions for stronger inflows when global factors turn favorable. By reducing regulatory burdens, improving speed, and providing more flexibility, these reforms could persuade some investors to stay invested longer.
Higher limits and simplified rules could also attract new categories of investors who were previously discouraged by complex procedures. Improving sentiment through visible reforms also strengthens India’s reputation as a responsive and forward-looking investment destination.
The measures aimed at debt markets, especially easing norms for government securities investors, could channel more capital into India’s bond market, providing stability even during equity outflows.
Reversing foreign investment outflows requires more than regulatory changes. Investors also look for strong corporate earnings, macroeconomic stability, and predictable policies. India must therefore continue broader structural reforms, including improving infrastructure, reducing corruption, simplifying taxes, and strengthening governance.
Global factors will remain decisive. A pause or reversal in US interest rate hikes could naturally redirect flows back to emerging markets like India. Until then, domestic reforms can only soften the impact, not eliminate it.
SEBI and RBI have taken several important steps to simplify entry, raise investment limits, and align regulations. These measures demonstrate a strong effort to reduce friction and improve investor confidence. While they may not fully reverse the ongoing trend of foreign investment outflows, they can help slow the pace of exits and prepare the ground for stronger inflows when external conditions improve.
The ultimate success of these efforts will depend on a mix of factors: stable global interest rates, consistent domestic policy, robust corporate earnings, and continued structural reforms. If these conditions are met, India can not only stop the bleeding of foreign capital but also position itself as one of the strongest investment destinations in the world.