In 2013, Morgan Stanley had placed India among the “Fragile Five” economies, arguing that the country’s dependence on foreign capital, widening deficits and weak policy environment made it vulnerable to external shocks
Chennai: Despite having governments with strong mandates for more than a decade as prescribed by Morgan Stanley while placing India among the 'Fragile Five' in 2013, India's net FDI, net FII flows are at multi-year lows. India needs structural policy reforms rather than temporary liquidity measures to attract foreign funds, find experts.
In FY25, net foreign direct investment was down to its lowest level in 25 years. FY25 also saw one of the largest net foreign institutional investment outflows in recent history. India's net FDI to GDP ratio, which had peaked in 2008 at 3.5 per cent, is now down to zero levels.
In 2013, Morgan Stanley had placed India among the “Fragile Five” economies, arguing that the country’s dependence on foreign capital, widening deficits and weak policy environment made it vulnerable to external shocks. The global brokerage had then suggested that a strong government could improve investor confidence, attract foreign money and stabilise the rupee.
More than a decade later, however, the reality appears far more complicated, Dhananjay Sinha, CEO and co-head, Institutional Equities, Systematix Group told Financial Chronicle. Expectations that political stability alone would trigger sustained foreign inflows into India have largely failed to materialise.
According to him, while there was optimism in FY15 after the change in government, foreign portfolio investment (FPI) flows remained modest for most of the period thereafter. In the 11 years till FY26, India saw only brief phases of meaningful inflows, while much of the period was marked either by outflows or weak participation from foreign investors.
FPI participation in Indian markets has steadily fallen and is now estimated at an all-time low of around 15-16 per cent. The FDI story, he argued, is equally concerning.
Although India continues to attract gross foreign direct investment of around $80-85 billion annually, repatriation of capital and profits by multinational companies has risen sharply. Nearly 65 per cent of incoming FDI is now being repatriated, sharply reducing net inflows.
“India’s net FDI-to-GDP ratio, which peaked at around 3.5 per cent in 2008, has now nearly fallen to zero. Once capital repatriation and profit outflows are combined, the outflows actually exceed fresh gross FDI inflows,” he said.
Sinha argued that foreign flows into India are influenced not just by global liquidity but also by domestic structural issues. Even during periods of easy global liquidity after the Global Financial Crisis, India did not witness sustained foreign inflows. Meanwhile, the rupee continued to depreciate sharply, eroding dollar returns for foreign investors.
Despite weak foreign participation, Indian markets continue to trade at elevated valuations due to strong domestic inflows. Mutual funds, SIP investors, family offices and affluent investors have largely supported markets and provided liquidity even as foreign investors exited.
However, Sinha warned that unless India creates a broad-based growth cycle driven by manufacturing, employment generation and private capex, sustaining investor confidence could become difficult.
According to him, India now needs structural policy reforms rather than temporary liquidity measures. A stronger manufacturing ecosystem, employment-intensive growth and rising household incomes are essential if the country wants to attract stable foreign capital and build a durable investment cycle.
