The Global Capital Balance Is Tilting

India, once seen as a global investment hotspot, is undergoing a test of confidence. Foreign portfolio investors (FPIs) have net sold $29.5 billion in Indian stocks so far this year, far exceeding last year's total of $18.9 billion. Although gross foreign direct investment (FDI) inflows exceeded $90 billion in the 12 months ending January 2026, up 13% year-on-year, the repatriation of capital by foreign companies and a surge in Indian firms' overseas investments have pushed net FDI to "near historic lows." This trend signals a fundamental shift in global capital's assessment of the Indian market.

Triple Pressure Overlay: Geopolitics, Energy, and Consumption

The resilience of the Indian economy faces challenges on multiple fronts. The conflict in the Middle East continues to push up global oil prices, and since India relies on imports for over 85% of its crude oil, the rupee has weakened significantly against the US dollar, exacerbating imported inflation. The Reserve Bank of India has raised its inflation forecast for fiscal year 2026/27 to 5.1% and cut its GDP growth forecast from 6.9% to 6.6%. At the same time, domestic consumption growth is sluggish, investment sentiment is fragile, and corporate expansion willingness is suppressed. Alexandra Hermann Prasad, Chief Economist at Oxford Economics, noted that India is "no longer the obvious one-way growth story that investors thought it was a few years ago."

Reform Engine Stalls: Structural Bottlenecks in the Third Term

The Modi government's pace of reform has clearly slowed in its third term. According to the India Reform Scorecard by the Center for Strategic and International Studies (CSIS), only 2 out of 30 major reforms have been completed in the past two years (since the start of the third term), far fewer than in the first and second terms. Land acquisition procedures and legal dispute resolution mechanisms have "not seen significant improvement," labor regulations have only marginally improved, and the availability of reliable and affordable electricity and water supply "remains a core challenge to India's industrialization goals." Although the government recently introduced a package of measures including a capital gains tax exemption for foreign bond investors, experts believe this is only "improving the atmosphere, not changing the main theme of the symphony."

Risk of Absence in the AI Race

In the global wave of AI investment, India faces the risk of being marginalized. In an open letter to Modi in April this year, Bernstein Research warned that advances in AI are threatening high-quality jobs in India's information technology industry, thereby affecting domestic consumption. Unlike China and the United States, India does not have any self-developed AI models and may become a "permanent consumer in the AI economy." Venugopal Garre, Head of India Research at Bernstein, pointed out that the only AI-related investment India can participate in is data centers, but this cannot replace the high-quality jobs lost in the IT sector.

Comparative Perspective: Global Capital ReallocationIndia is not the only emerging market facing capital outflow pressure, but its structural weaknesses make it particularly vulnerable. Against the backdrop of global capital accelerating toward regions with higher certainty—such as the U.S. AI supply chain and Southeast Asian manufacturing clusters—India's shortcomings in labor flexibility, infrastructure reliability, and technological self-sufficiency have been magnified. Meanwhile, Southeast Asian countries like Vietnam and Indonesia are attracting manufacturing relocation through more proactive free trade agreements and industrial policies, creating competition for India's FDI.

Long-term Outlook: Reform Window Still Exists

Despite severe short-term challenges, India still boasts a vast domestic market, a young demographic structure, and a continuously improving business environment. Sajith Bhala, a former member of the Prime Minister's Economic Advisory Council, has urged the government to leverage the economic pressures from the Middle East crisis to drive reforms. Whether the Modi government can accelerate structural reforms and enhance its participation in the global AI value chain will determine whether India can once again become a priority destination for global capital. Currently, global investors are scrutinizing this South Asian giant with a more critical eye—the next chapter of the growth story will depend on policy implementation rather than sheer demographic dividends.

*This article is based on public information and the views of research institutions and does not constitute investment advice.*