Key Highlights :

• India’s net foreign direct investment (FDI) plunged by 98.2% year-on-year to just $40 million in May 2025

• A dramatic month-on-month drop from $3.9 billion in April 2025

• Gross FDI inflows declined to $7.2 billion from $8.7 billion

• The fall was driven by higher capital repatriation and investor caution

• Net FDI hits lowest level since early 2021, raising economic concerns

What Happened ?

India witnessed a steep decline in net FDI inflows in May 2025, a staggering 98.2% drop from the same month last year. According to data from the Reserve Bank of India, net FDI was just $40 million compared to $2.2 billion in May 2024, and $3.9 billion in April 2025.

While gross FDI inflows remained relatively healthy at $7.2 billion, the real issue was rising outward flows including divestments, capital repatriation, and exit of strategic foreign investors, which drastically pulled down net inflows.

Why Did India’s FDI Collapse in May ?

1. Global Liquidity Tightening

Persistently high interest rates by the US Federal Reserve and European Central Bank have made Western assets more attractive, drawing capital away from emerging markets like India.

2. Political Uncertainty Pre-Elections

The general elections in May 2025 prompted foreign investors to delay investment decisions, awaiting clarity on government continuity and future reforms.

3. Strategic Exits by Global Investors

Multinational corporations are restructuring their portfolios, exiting non-core Indian businesses in telecom, retail, and fintech contributing to higher capital outflows.

4. Sectoral Challenges

Tighter regulations in e-commerce, fintech, and gaming, along with valuation mismatches in India’s startup ecosystem, have made FDI less attractive in the short term.

5. Higher Dividend Repatriation

Many foreign firms operating in India are repatriating higher profits, taking advantage of a relatively stable rupee and strong earnings thereby reducing net FDI.

Impact on Economy & Markets

The sudden FDI dip could pose challenges for India’s external sector, especially when the trade deficit remains elevated.

While the rupee has stayed stable, largely due to RBI’s forex interventions, a continued FDI slowdown could create currency pressure and weaken India’s capital account position.

However, inflows into sectors like EVs, green energy, infrastructure, and semiconductors are expected to hold firm suggesting that India's FDI story is far from over, even if short-term flows remain volatile.

What’s Next for India’s FDI Outlook ?

Analysts believe the May 2025 numbers, while worrying, are not yet indicative of a structural trend. But the severity of the drop is a strong signal to policymakers.

To revive investor confidence, India may need to:

• Fast-track FDI policy reforms in sensitive sectors

• Improve ease of doing business, especially for large global investors

• Offer regulatory clarity in digital economy and manufacturing

• Leverage its post-election stability to present a renewed FDI roadmap

Final Word : A Warning, Not a Crisis

India’s 98% plunge in net FDI in May 2025 is a sharp warning shot not a full-blown crisis. It reflects global caution, capital flight, and short-term jitters more than structural weakness.

Yet, in a world competing for mobile capital, India must act fast to maintain its image as a top investment destination. With the elections over and political stability restored, the coming quarters will be crucial in defining whether this was a one-off dip or a red flag that policymakers failed to address.