Foreign investment recovery shows growing confidence in economy: RBI article

Mumbai: An article by the Reserve Bank of India (RBI) on Wednesday said the recent recovery in foreign investment shows a revival of confidence in the Indian economy.

The article, State of the Economy, written by central bank executives and published in its July bulletin, carried the usual disclaimer that views expressed are those of the authors and do not represent those of RBI.

“The gross and net foreign direct investment (FDI) were higher in April-May 2026 than the previous year. Net foreign portfolio investment (FPI) flows turned positive in June and maintained positive flows in July amidst policy support and easing geopolitical tensions,” it said.

While net FDI stood at $6.5 billion in April-May, it was $2.5 billion in the same period last year, per RBI data.

It said that the Indian equity markets gained in June and early July, reflecting the improved sentiment following the US-Iran ceasefire agreement, easing crude oil prices and a rebound in net buying by foreign portfolio investors (FPI). With the announcement of the cessation of the ceasefire in West Asia on 8 July, the equity markets witnessed a correction amidst soaring crude oil prices and thereafter, remained range-bound.

So far this financial year, FPIs are net sellers of $13.28 billion worth of equities, and net buyers of $7.8 billion in the debt market.

Widened access

In June, the RBI, in a coordinated move with the Centre, widened overseas investors’ access to government securities, eased investment restrictions for foreign portfolio investors (FPIs), and backed tax exemptions on sovereign bond investments.

Non-resident Indians (NRIs) have poured $17.41 billion into Indian banks through foreign currency non-resident (FCNR) deposits under a new deposit incentive scheme, recording a promising start to the campaign to attract dollars and strengthen the rupee. Apart from FCNR(B) deposits, the swap window also received $1.97 billion in overseas foreign currency borrowings and $1.34 billion through external commercial borrowings.

RBI said with the recent policy measures on non-resident deposits, overseas foreign currency borrowings and external commercial borrowing inflows by the RBI, including a concessional swap facility for fresh FCNR(B) deposits, there was a surge in FCNR(B) deposit inflows.

“During June, the US 10-year treasury yield remained elevated while exhibiting volatility. It hardened further in early July amidst expectations of a tighter monetary policy before easing in response to soft inflation data,” it said.

That aside, the US Dollar Index strengthened in June but pared gains in July, driven by easing inflation. Foreign investors reduced exposure to emerging market equities in June, while debt inflows partly offset the sell-off, it said.

“The global economy is continuing with the heightened uncertainties emanating from fragile geopolitics and supply chain pressures. The domestic economy has navigated the external uncertainties well, underpinned by healthy demand conditions and resilient performance of the industrial and services sector,” the authors wrote.

Core inflation low

The article said that headline retail inflation inched up in June while core inflation, especially excluding precious metals remained low. Liquidity conditions improved further, supporting the ongoing robust credit growth.

“India’s external sector remains steady with improving outlook, aided by inflows of foreign investments,” it said.

India’s retail inflation rose to 4.38% in June, on the back of higher food and fuel prices. It breached Reserve Bank of India’s 4% midpoint target for the first time since January 2025.

The report said that the global economy is dealing with an uncertain economic environment, supply chain disruptions, and fragmented trading relationships.

“Amidst these uncertainties, India remains among the fastest growing major economies across the globe and has been able to sustain the momentum in economic activities through June,” it said.