Source: TH
Context:
The Reserve Bank of India (RBI) reported a 159% decline in net Foreign Direct Investment (FDI) in August 2025, indicating that more money left India than entered it. This marks the second time in FY26 that outflows have exceeded inflows, signaling volatility in foreign investment trends.
What is FDI?
Foreign Direct Investment (FDI) refers to long-term capital investment by a foreign entity (company or individual) in another country’s business or assets, typically to gain a controlling interest.
It is different from Foreign Portfolio Investment (FPI), which involves short-term financial assets like stocks or bonds.
Types of FDI:
- Greenfield Investment: Building new facilities or plants (e.g., a new factory).
- Brownfield Investment: Acquiring or merging with existing companies.
FDI Components:
- Gross Inflows: Total money invested by foreign investors in India.
- Repatriation/Disinvestment: Money withdrawn or sent back by foreign firms.
- Net FDI: Gross inflows minus repatriations/outflows.
Possible Causes of FDI Outflow:
- Profit Repatriation: Multinational corporations (MNCs) transferring profits to parent companies abroad.
- Geopolitical and Economic Uncertainty: Investors shifting capital to safer markets.
- High Interest Rates Globally: Developed markets becoming more attractive.
- Corporate Restructuring: Indian firms investing abroad for diversification.
- Regulatory or Policy Concerns: Periodic policy uncertainty or compliance issues.
Consequences of FDI Outflow:
Short-Term Impact:
- Rupee Pressure: Increased demand for foreign currency may depreciate the rupee.
- Reduced Capital Availability: Affects startups, manufacturing, and infrastructure funding.
- Weaker Balance of Payments: Negative FDI flows can widen the current account deficit (CAD).
Long-Term Implications:
- Investor Sentiment: May dent India’s reputation as a stable investment destination.
- Employment & Growth: Lower FDI affects job creation and technology transfer.
- Policy Reforms Pressure: May push the government to liberalize FDI norms and improve the ease of doing business.
- Sectoral Shifts: Outflows may indicate overvaluation or sector-specific saturation in industries like IT or manufacturing.
