Finance Minister Nirmala Sitharaman on Monday signaled that the Indian government is prepared to introduce a series of additional steps to attract foreign investment into the country, describing recent tax exemptions as only the first move in a broader strategy.
Speaking at the Hero Mindmine Summit 2026, Sitharaman said the government’s decision to exempt withholding tax on interest and capital gains tax for foreign investors in government securities was an opening step toward drawing foreign capital back into Indian markets.
“Certainly, that’s not the end of the story there will be more. We recognise we need more foreign capital to come in,” she said.
India continues to attract substantial foreign capital, but the underlying investment picture is more complex than headline figures suggest.
While gross foreign direct investment (FDI) inflows have remained strong, net inflows have been weighed down by rising capital repatriation by multinational corporations and increased overseas investments by Indian firms. According to recent reports, India attracted $90.8 billion in FDI during the 12 months ending January 2026. However, net FDI slipped to near historic lows as outbound flows offset much of the incoming capital. More recent data offers a somewhat brighter outlook: gross FDI in FY2025–26 rose 17% to a record $94.5 billion, while net inflows recovered to $7.7 billion, indicating cautious investor confidence despite an uncertain global environment.
Foreign investors have become more selective toward India in recent months. Higher U.S. tariffs, elevated bond yields, and a stronger dollar have reduced appetite for emerging-market assets, while geopolitical tensions have further clouded the outlook. Investors have also rotated capital toward other Asian markets where valuations appear more attractive or policy momentum is stronger. India’s premium equity valuations, coupled with concerns over export growth and corporate earnings, have made it increasingly difficult for global funds to justify maintaining large positions. In some cases, investors have even shifted allocations toward China, where valuations are perceived to offer better value. These factors have contributed to significant foreign institutional investor (FII) selling, triggering some of the largest withdrawals from Indian markets in years.
The longer-term trajectory of foreign investment will depend heavily on policy effectiveness, earnings growth, and currency stability.
Supportive government and central bank measures have provided some optimism. Analysts note that India’s 7.4% GDP growth, backed by fiscal stimulus, monetary easing, and expanding trade agreements with the United States and European Union, could encourage foreign investors to return if corporate profitability strengthens. However, strong economic growth alone may not be enough. Previous periods of robust expansion have not always translated into corresponding earnings growth, meaning investors will ultimately focus on the potential for sustainable returns.
Market performance is also likely to remain highly sensitive to foreign capital flows. Renewed investor interest typically benefits large-cap stocks first, while prolonged outflows tend to weigh on broader market sentiment and disproportionately affect mid-cap companies. Recent episodes have demonstrated how quickly sentiment can shift, with foreign inflows reaching 10-month highs during periods of strong large-cap buying, only to reverse when global risk appetite weakened.
Despite these challenges, foreign investment remains concentrated in a handful of high-growth sectors. Total FDI inflows reached a record $81 billion in FY25, representing a 14% increase from the previous year. Manufacturing emerged as a major beneficiary, with inflows rising 18% to $19.04 billion.
The services sector attracted the largest share of foreign investment, accounting for 19% of total FDI equity inflows. Investments into financial services, banking, insurance, business services, research and development, and technical services climbed to $9.35 billion, up more than 40% from $6.64 billion a year earlier. Computer software and hardware ranked second, capturing 16% of total FDI equity and attracting more than $7 billion in FY24.
During the first quarter of FY2025–26, computer software and hardware remained the leading destination for foreign investment, drawing ₹46,801 crore (approximately $5.46 billion), or 29% of total inflows. The services sector followed with ₹28,024 crore (around $3.28 billion), representing 18% of the total. Automobiles, pharmaceuticals, and renewable energy rounded out the top five sectors, each accounting for between 6% and 7% of inflows.
Looking ahead, the government is targeting several strategic industries to attract greater foreign participation. Priority sectors include electronics manufacturing, electric vehicles, medical devices, chemicals, non-leather footwear, and toys. Production-linked incentive (PLI) schemes have already helped accelerate investment in mobile phone manufacturing and are expanding domestic production of components such as compressors, motors, and copper tubing used in air conditioners. Similar initiatives are also boosting investment in pharmaceuticals and medical devices, positioning these industries as key drivers of India’s next phase of manufacturing growth.
Read Article: China Prepares mBridge Launch, Targets Faster Cross-Border Payments Beyond SWIFT Network
