India’s capital flows travails seemingly were set for a reversal of fortunes before the US and Israel attacked Iran, with February not only seeing net Foreign Direct Investment (FDI) inflows return to positive territory after a gap of six months but also surge to the highest level in nearly four years. According to data released by the Reserve Bank of India (RBI) on Thursday, India saw net FDI inflows of $4.62 billion in February – the most since it got $5.31 billion in May 2022 – as global investor sentiment reversed in the wake of the signing of an interim trade deal between the India and the US early that month, which eliminated the penal 25% tariff and reduced the reciprocal tariff to 18% from 25%.
The sharp pickup in net FDI in February took the total for the first 11 months of 2025-26 to $6.27 billion, more than four times higher than the $1.46 billion recorded in the same period of 2024-25. In 2024-25 as a whole, India saw net FDI inflows of a mere $959 million. Gross FDI for April 2025-February 2026 stood at $88.30 billion, up 18% year-on-year.
The jump in net FDI in February was on the back of higher gross inflows of $8.98 billion as well as a multi-year decline in repatriations by foreign investors to $1.74 billion. The last time foreign investors took back home less money than in February was in September 2020, when they had repatriated $817 million.
Repatriation of FDI refers to foreign investors taking back money they had previously invested in India. This repatriation can be in the form of profits, dividend, or sale of assets. Net FDI is calculated after adjusting for gross FDI for investments that are repatriated by foreign companies and overseas investments made by Indian companies.
“As India has built up a large stock of FDI over the past several years, foreign firms operating in the country are increasingly repatriating profits and dividends to their parent entities. Healthy profits of multinational subsidiaries in India and easier profit transfer rules have in turn accelerated investment income outflows,” Morgan Stanley economists Upasana Chachra and Bani Gambhir said in a note on Wednesday. “The trend in net FDI remains crucial from an external balance sheet perspective, as FDI is typically a more stable source of financing for the current account. A sustained weakening in net flows could increase reliance on more volatile portfolio capital, with potential spillovers to external balance metrics, currency stability and financial markets.”
FDI by Indian companies in February remained robust at $2.63 billion, with around 75% of the outward FDI going to Singapore, the UAE, and the UK, the RBI said on Thursday in its monthly State of the Economy article.
Weak net FDI numbers have been a concern for policymakers as it has weighed on the rupee’s exchange rate. Adding to pressures has been the dumping of Indian stocks and debt by foreign portfolio investors (FPIs), although even that trend reversed sharply in February. After selling $3.24 billion of Indian financial assets in the first month of 2026, FPIs bought $4.17 billion of equity and debt in February, helping the rupee appreciate by 1.1% against the US dollar that month to end at 90.98.
Story continues below this ad
However, the war in West Asia has more than erased those gains, with March seeing FPIs exit Indian financial markets to the tune of $13.6 billion. Consequently, the rupee dropped past 92-, 93-, 94-, and 95-per-dollar in quick succession last month. Net FPI sales in 2025-26 totalled a record $16.59 billion.
The reversal of flows in February also allowed the RBI to add to its kitty of foreign exchange reserves, as it bought $7.41 billion of foreign currency on a net basis, the most in 11 months.
The RBI’s holdings of foreign currency are a crucial buffer to protect the rupee’s exchange rate from volatility. In April 2025-February 2026, the Indian central bank sold $166 billion of foreign currency on a gross basis to shore up the rupee. This is sharply lower than the near $400 billion of sales it had made in all of 2024-25.
The RBI will release FDI data for March in the second half of May. So far in April, FPIs have sold India shares and bonds worth $6.04 billion, with the rupee closing at 94.11 per dollar on Thursday, having weakened 4.2% so far in 2026 despite measures taken by the RBI to curb speculative bets against the Indian currency. As per the RBI’s measure of the rupee’s Real Effective Exchange Rate – also released on Thursday – the 40-currency, trade-weighted REER fell further to 92.72 in March – the lowest in exactly 12 years – suggesting the rupee is currently undervalued by around 8-9% against a basket of 40 currencies.
Story continues below this ad
The 40-currency REER measures the rupee’s exchange rate against a basket of 40 currencies after adjusting for each country’s respective inflation rates.
