India attracts capital. Why can’t it keep it?

India’s foreign direct investment (FDI) data for 2025-26 reveals a stark contrast between gross inflows and net retention. Gross FDI hit a record $94.53 billion, a 17% increase, but net FDI—after repatriation and outbound investments—fell to just $7.65 billion, the lowest retention ratio in available records. This trend reflects five consecutive years of declining net FDI retention, with only 8 cents retained per gross dollar invested. March 2026 highlighted the issue with a dramatic shift: net foreign investment outflows of $11.8 billion, reversing February’s $7.4 billion inflows. Net FDI dropped from $4.4 billion to $1.6 billion, while net portfolio investment swung from $2.9 billion to a negative $13.3 billion. The Reserve Bank of India (RBI) governor attributed these fluctuations to cyclical and short-term factors, but the data suggests deeper structural challenges. The composition of FDI has shifted, with more private equity and conduit flows through Singapore, Mauritius, and the Netherlands, rather than long-term strategic investments. Sectoral trends show software and services leading inflows at $13.9 billion and $10 billion, respectively, while manufacturing received only $2.5 billion. India remains the top Global South recipient of greenfield digital-economy FDI, but this success contrasts with industrial policy goals. Indian companies also ramped up outbound investments, pouring $33.3 billion abroad in FY26—nearly double the amount four years prior—with additional $5.6 billion committed in April 2026. Chief Economic Advisor V. Anantha Nageswaran warned of a widening current account deficit to 2-2.5% of GDP in FY27, requiring $80-120 billion in external financing due to geopolitical risks. The Asian Development Bank projected 6.8% growth for FY27 but flagged downside risks from elevated energy prices and geopolitical uncertainty. The divergence between gross and net FDI raises questions about India’s ability to retain capital despite record inflows. While explanations vary—cyclical fluctuations, structural shocks, or moderating trends—the declining retention ratio signals a broader challenge in sustaining long-term foreign investment.