India’s Capital Gap Pressures Rupee Stability

India’s weakening capital inflows are placing renewed pressure on the rupee, exposing a gap in the economy’s external position that lower imports alone cannot resolve. The issue is not only trade discipline, but the country’s ability to attract durable foreign capital.

Recent analysis cited in the report shows that capital flows have fallen sharply, from an average of 2.6% of GDP between 2015 and 2019 to 1.4% in 2024 and almost nothing in 2025. Much of the decline has come from weaker net foreign direct investment, which has dropped from 1.5% of GDP before the pandemic to 0.1% last year. Persistent foreign portfolio selling has added further pressure.

The deeper concern is that India has become more exposed to global financial conditions. Over the past 15 years, net FDI flows have shown a strong inverse relationship with US 10-year Treasury yields, with easier conditions during the pandemic helping inflows rise. Higher US yields, by contrast, have drawn capital back, particularly through repatriated funds and outbound FDI.

India’s stronger pull factors were more visible between 2005 and 2010, when a major domestic capital expenditure cycle helped attract investment. Since then, foreign capital has become more dependent on external conditions, while equity investors have shifted towards markets with clearer investment magnets, including artificial intelligence and commodities.

Policy improvements have been made, including legal decriminalisation measures and wider foreign investment access in selected sectors. Banking has seen major foreign deals, while higher insurance FDI limits have encouraged large shareholding shifts. Yet slower progress on asset monetisation and privatisation leaves the unresolved question clear: without stronger domestic pull factors, India’s external resilience may remain vulnerable to fickle capital flows.