E-Paper
Why India Is Well Positioned to Attract Global Capital in a Changing World
India's economic landscape is favorable amid global uncertainties, with strong growth potential, macroeconomic stability, and resilient external performance.
The global investment landscape continues to be shaped by geopolitical uncertainty, evolving trade dynamics, elevated commodity-price volatility and shifting capital flows. Against this backdrop, India remains one of the few major economies offering a combination of strong growth potential, macroeconomic stability, policy continuity and long-term structural opportunities. Recent developments in energy markets and policy measures aimed at attracting foreign capital have further strengthened India's relative position as an investment destination.
A key positive development has been the easing of geopolitical tensions in West Asia, which has contributed to a moderation in crude oil prices from recent peaks. For an economy that imports the majority of its crude oil requirements, this has meaningful implications. Lower oil prices reduce inflationary pressures, support corporate profitability, improve external balances and ease pressure on the currency. Importantly, several of the challenges India faced during the past year were externally driven rather than reflective of domestic economic weakness.
India’s underlying macroeconomic resilience remains evident in its external sector performance. Despite a significant widening in the merchandise trade deficit during FY26 to USD 337 billion, the current account deficit remained contained at just 0.6% of GDP, among the lowest across major emerging markets. Strong services exports and healthy remittance inflows continued to offset much of the pressure from higher imports. Net services receipts increased to USD 217 billion in FY26 and are projected to rise further to USD 245 billion in FY27, highlighting the growing importance of India's services economy in supporting macroeconomic stability.
The strength of the external sector was particularly visible in the final quarter of FY26 when India recorded a current account surplus of 0.7% of GDP despite a merchandise trade deficit of over USD 83 billion. Services exports generated a surplus equivalent to 5.8% of GDP, while remittances remained robust, underscoring the resilience of India's external earnings engine even amid a difficult global environment.
From an investment perspective, perhaps the most significant recent development has been the coordinated policy response by the RBI and the Government aimed at improving India's balance of payments position and attracting long-term foreign capital. Measures relating to FCNR deposits, external commercial borrowings and tax incentives for foreign investors in government securities are expected to attract roughly USD 40-50 billion of capital inflows during FY27. Additional inflows of USD 15-20 billion could materialise if India receives further inclusion in global bond indices.
These measures have the potential to materially improve India's external financing position. Under a high oil-price scenario of USD 95 per barrel, India's current account deficit could widen to around 2.1% of GDP in FY27. However, the expected recovery in capital inflows could generate a capital account surplus of nearly USD 80 billion, thereby significantly reducing balance-of-payments risks and supporting currency stability.
For foreign investors, currency stability remains an important determinant of asset allocation decisions. Over the past year, rupee weakness and concerns around higher oil prices acted as a headwind for FII flows. Encouragingly, recent policy actions have already improved investor sentiment, with the rupee appreciating approximately 1.6% from its recent lows following the RBI and government initiatives aimed at attracting foreign capital.
Foreign institutional investor flows have undoubtedly remained cautious. FIIs sold nearly USD 30 billion of Indian equities in 2026 year-to-date, reflecting global risk aversion, elevated US yields and the concentration of global investor interest in AI-linked technology markets such as Korea and Taiwan. However, the setup for India appears increasingly constructive. FII ownership in Indian equities has reduced materially after intense selling, valuations have become more reasonable relative to historical levels, and India is increasingly positioned as a potential destination for capital redeployment as global investors rebalance portfolios.
Equally important is the growing strength of domestic participation. Domestic institutional investors continue to provide a strong counterbalance to foreign selling. In May 2026 alone, DIIs purchased USD 8.7 billion of equities compared to FII selling of USD 4.9 billion. SIP inflows remained remarkably stable at approximately USD 3.2 billion per month despite market volatility, while mutual funds continued deploying cash to support equity purchases. This deepening domestic investor ecosystem has become a powerful source of resilience for Indian capital markets.
The structural shift in Indian market ownership is particularly noteworthy. Over the last decade, the share of domestic investors in Indian equities has steadily increased, reducing dependence on foreign capital and improving market stability during periods of global uncertainty. This evolution of India's savings-to-investments cycle represents one of the most significant long-term changes in the country's capital markets.
Beyond cyclical factors, India's long-term growth drivers remain firmly intact. Domestic consumption continues to expand, government-led infrastructure spending remains strong, credit growth remains healthy and manufacturing investments are being supported by initiatives such as Make in India and the Production Linked Incentive programme. Continued formalisation of the economy, digitisation, improving tax compliance and policy reforms are reinforcing the foundations for sustained economic growth.
While risks remain—including monsoon uncertainty, global growth moderation and potential commodity-price volatility—they do not materially alter India's long-term investment thesis. In fact, India's ability to maintain one of the lowest current account deficits among major emerging economies despite a challenging external environment demonstrates the strength of its macroeconomic framework.
The recent easing in geopolitical risks, improving outlook for crude oil prices, policy measures designed to attract foreign capital, resilient domestic demand and strengthening domestic capital markets are collectively improving India's investment appeal. While short-term volatility may persist, the medium- to long-term outlook remains constructive.
In a world where growth opportunities are becoming increasingly scarce, India continues to offer a rare combination of economic growth, policy stability, earnings potential, capital-market depth and structural reform momentum. As global investors reassess opportunities across emerging markets, India remains well positioned to attract a larger share of long-term global capital in the years ahead.
Source for market data: Bloomberg
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This article is written by Sudhanshu Asthana, CIO-Equity, LIC Mutual Fund.
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