Foreign Direct Investment (FDI) and Portfolio Investment India

Slowdown in India's foreign inflows in May.

Published monthly by RBI. Updated till May 2018 (published on July 10th, 2018)

Recent Data Trend

In May'18, net foreign inflows showed a slowdown and stood at USD 3.9 billion, after increasing to USD 4.8 billion in April'18. Foreign portfolio investment (FPI), on the other hand, continued to contract further down to USD 4.1 billion in May '18. The total investment inflow was at USD -0.14 billion, the lowest since Dec'2016, mainly due to the reduction in the FPI inflows.

Country-specific data suggests that Mauritius continued to be the top investing country and contributed 34% to total inflows. It was followed by Singapore (17%) and Japan (7%) respectively. The top three sectors attracting the highest FDI equity inflows were services (17% of total inflows), telecommunications (8%) and computer hardware & software.

For FY18, it was the influx of portfolio inflows which compensated for the deficit in the current account. The portfolio inflows performed better in FY18 compared to FY17, while we witnessed FDI inflows slowed down to USD 31 billion in FY18 from USD 35.7 billion in FY17.

In our view, the slowing down of stable FDI flows will become a concern in covering for the soaring current account deficit which has already tripled to 1.9% of GDP in FY18, on the back of rising global crude oil prices. If the crude oil prices continue to rally in FY19, the CAD is expected to reach more than 2.5% of GDP and after a long time we may witness of BoP deficit situation and a loss in reserve assets. This won't bode well for the rupee which has already lost more than 5% against the USD since the beginning of 2018.

Brief Overview

Foreign Institutional Inflows (FIIs) imply investments registered in a country outside of the one in which it is investing. It constitutes Foreign Direct Investment(FDI), Equity inflows, Non-Residing Indian (NRI) Deposits, etc. However, FDI has been the most attractive form of capital inflow. By definition, FDI is an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company. Portfolio investment, on the other hand, is a hands-off or passive investment of securities in a portfolio, and it is made with the expectation of earning a return. It is distinct with FDI which involves taking a sizable stake in a target company and possibly being associated with its day-to-day management. From a sectoral perspective, FDI has mostly flowed into services sector, followed by the manufacturing sector. In India, foreign investment was mainly introduced in 1991 under Foreign Exchange Management Act (FEMA). The two routes under which foreign investment can be made are automatic route and the government route.

Historically, there has been a sea change in India's approach towards foreign investment since the early 1990s. Pre-liberalisation, FDI through foreign collaboration was only allowed in specific sectors related to high technology. A major shift occurred post-1991 reforms, whereby, restrictions were gradually removed in low technology areas. Over the last decade, reform measures have steadily gained momentum, as is evident from the ever-increasing volumes of FDI inflows being received in India.

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Next Release Date: August 10th,2018

Foreign Investment-Quarterly

Foreign Investment-Annual

FDI inflows by Sector