Tuesday, 28 Jul, 2026
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Macroeconomic stability has become a strength. The next test is whether structural reforms can sustain growth above 7% over the long run
Foreign investors have rediscovered India. That is the comforting message from the Reserve Bank of India’s (RBI’s) latest State of the Economy report. Net foreign direct investment (FDI) rose to $6.5 billion during April-May FY27 from $2.5 billion a year earlier. Foreign portfolio investors (FPIs), who had fled Indian markets for much of 2025, have returned to both equity and debt. Foreign exchange reserves remain ample, external vulnerability indicators are benign, and FCNR(B) deposits have surged after the RBI’s concessional swap window.
It all sounds reassuring. Yet there is more to the story than a revival of investor confidence.
The first point worth making is that India never suffered from a shortage of foreign interest. It suffered from global uncertainty. Between the US Federal Reserve’s high interest rates, wars in Europe and West Asia, and slowing growth in China, capital became more selective everywhere. India was caught in that tide. The recent improvement reflects not only India’s strengths but also a friendlier global environment. Easing geopolitical tensions and expectations of monetary easing in advanced economies have encouraged investors to seek higher returns in emerging markets once again.
More significantly, the encouraging feature is not portfolio flows, which are notoriously fickle, but direct investment. Unlike FPIs, multinational companies cannot move factories with the click of a mouse. They invest only when they see long-term opportunities.
The RBI report shows net FDI rising sharply during April-May, supported by strong equity inflows and lower repatriation by existing investors. Japan, Singapore and Mauritius together accounted for almost three-fourths of equity inflows, while financial services, manufacturing, wholesale trade and computer services attracted around 80 per cent of investments.
This suggests that investors continue to view India as a long-term growth market rather than merely a financial trade.
However, one should not become euphoric. The April-May numbers flatter because April was exceptionally strong while May slipped back into a marginal net outflow. Gross FDI inflows more than halved from over $15 billion in April to around $6 billion in May. Such volatility reminds us that two months do not establish a trend.
The larger concern remains India’s inability to convert foreign investment into a manufacturing revolution.
Production-linked incentives have certainly succeeded in attracting investment into electronics, pharmaceuticals and renewable energy. Smartphone exports have soared, making India one of the world’s largest exporters. Yet manufacturing still accounts for only around 17 per cent of GDP, far below the level achieved by successful Asian industrialisers.
Recent government data show that food processing has generated more jobs under the PLI scheme than electronics, despite receiving far less policy attention and investment. That is an uncomfortable reminder that policymakers often celebrate investment announcements while paying insufficient attention to employment outcomes.
Worth noting here is that the economy continues to provide reasons for optimism. The RBI notes that industrial production and services activity remained resilient through June despite considerable global uncertainty. Rural demand has shown signs of improvement, urban consumption remains reasonably healthy, and exports have held up better than expected.
The external account also looks remarkably comfortable. Foreign exchange reserves remain among the largest in the world. External debt ratios are manageable. The RBI’s special swap facility has attracted $17.4 billion of fresh FCNR(B) deposits within just over a month, strengthening the country's foreign currency buffers without creating undue stress.
That gives the central bank valuable room to manage currency volatility should global markets turn turbulent again.
Inflation, meanwhile, has become less threatening than it appeared a year ago. Food prices pushed headline inflation slightly higher in June, but core inflation remains subdued. But none of this should breed complacency.
India’s growth story increasingly depends less on macroeconomic stability—which has improved markedly over the past decade—and more on structural reforms. Investors are no longer asking whether India is stable. They are asking whether it can sustain growth above 7 per cent for another decade.
That depends on land acquisition, labour productivity, judicial efficiency, logistics, urban governance and education far more than on quarterly FDI figures.
Economists say investors have returned because India remains one of the few large economies capable of delivering relatively high growth amid global uncertainty. Whether they stay will depend on whether India can deliver the next generation of reforms.
The RBI’s latest assessment therefore deserves to be read with cautious optimism. The recovery in foreign investment is welcome. It validates India’s macroeconomic stability and policy credibility. But the harder task lies ahead. Sustained prosperity will depend not on attracting more foreign money alone, but on using that capital to raise productivity, create millions of quality jobs and deepen India’s manufacturing base.
