The global investment landscape is being shaped by geopolitical uncertainty, changing trade dynamics, increased commodity-price volatility and changes in capital flows. Against this backdrop, India remains one of the few major economies offering a combination of strong growth potential, macroeconomic stability, policy continuity and long-term structural opportunities. Recent developments in energy markets and policy measures aimed at attracting foreign capital have further strengthened India’s relative position as an investment destination.
A major positive development is the easing of geopolitical tensions in West Asia, which has contributed to the decline in crude oil prices from recent peaks. For an economy that imports most of its crude oil needs, this has significant implications. Low oil prices reduce inflationary pressures, support corporate profitability, improve external balances and reduce downward pressure on the currency. Importantly, many of the challenges India faced over the past year were driven by external factors rather than reflecting domestic economic weakness.
India’s underlying macroeconomic resilience remains evident in its external sector performance. Despite the merchandise trade deficit widening significantly to USD 337 billion by FY26, the current account deficit remained limited to only 0.6% of GDP, the lowest among major emerging markets. Strong services exports and healthy remittance inflows continued to largely offset the pressure of higher imports. Net service receipts are projected to grow to US$217 billion in FY26 and US$245 billion in FY27, highlighting the growing importance of India’s service economy in supporting macroeconomic stability.
The strength of the external sector was particularly visible in the last quarter of FY26, when India recorded a current account surplus of 0.7% of GDP despite a merchandise trade deficit of over US$83 billion. Services exports generated a surplus equal to 5.8% of GDP, while remittances remained strong, underscoring the resilience of India’s external earning engine even amid a tough global environment.
From an investment perspective, perhaps the most important recent development is the coordinated policy response by the RBI and the government aimed at improving India’s balance of payments position and attracting long-term foreign capital. Measures related to FCNR deposits, external commercial borrowings and tax incentives for foreign investors in government securities are expected to attract capital inflows of about US$ 40-50 billion during FY 2027. If India is further included in global bond indices, there could be an additional inflow of US$ 15-20 billion.
These measures have the potential to improve India’s external financing position. Under a higher oil-price scenario of US$95 per barrel, India’s current account deficit could widen to about 2.1% of GDP in FY2027. However, the expected improvement in capital flows could generate a capital account surplus of approximately US$80 billion, which would significantly reduce balance of payments risks and support currency stability.
For foreign investors, currency stability remains an important determinant of asset allocation decisions. Last year, rupee weakness and concerns over high oil prices acted as a hindrance to FII inflows. Encouragingly, recent policy actions have already improved investor sentiment, with the rupee rising about 1.6% from its recent low following RBI and government initiatives aimed at attracting foreign capital.
Foreign institutional investor flows undoubtedly remain cautious. FIIs have sold Indian equities worth nearly US$30 billion so far in 2026, reflecting global risk aversion, increased US yields and interest from global investors in AI-linked technology markets like Korea and Taiwan. However, the setup for India is looking increasingly constructive. FII ownership in Indian equities has declined substantially following the massive selloff, valuations have become more reasonable than historical levels, and India is increasingly being positioned as a potential destination for capital redeployment as global investors rebalance portfolios.
Equally important is the growing strength of domestic participation. Domestic institutional investors continue to provide a strong balance to foreign selling. In May 2026 alone, DIIs bought equities worth US$8.7 billion, while FIIs sold US$4.9 billion. SIP flows remained remarkably stable at around US$3.2 billion per month despite market volatility, while mutual funds continued to deploy cash to support equity purchases. This deepening domestic investor ecosystem has become a powerful source of resilience for Indian capital markets.
The structural change in Indian market ownership is particularly notable. Over the past decade, domestic investors’ stake in Indian equities has steadily increased, reducing dependence on foreign capital and improving market stability during global uncertainty. This evolution of India’s savings-to-investment cycle represents one of the most significant long-term changes in the country’s capital markets.
Beyond cyclical factors, India’s long-term growth drivers remain strongly intact. Domestic consumption continues to expand, government-led infrastructure spending remains strong, credit growth remains healthy and manufacturing investment is being supported by initiatives such as Make in India and production-linked incentive programmes. Continued formalization of the economy, digitalization, improved tax compliance and policy reforms are strengthening the foundation of sustained economic growth.
While risks remain – including monsoon uncertainty, slowing global growth and potential commodity-price volatility – they do not materially change India’s long-term investment thesis. In fact, India’s ability to maintain the lowest current account deficit among major emerging economies despite a challenging external environment reflects the strength of its macroeconomic framework.
The recent reduction in geopolitical risks, improving outlook for crude oil prices, policy measures designed to attract foreign capital, resilient domestic demand and strengthening domestic capital markets are collectively improving India’s investment appeal. Although short-term volatility may persist, the medium to long-term outlook remains constructive.
In a world where growth opportunities are shrinking, India offers a rare combination of economic growth, policy stability, earning potential, capital-market depth and pace of structural reforms. As global investors are reevaluating the opportunities in emerging markets, India is well-positioned to attract a large share of long-term global capital in the coming years.
Market data source: Bloomberg
SEBI Reg: LIC Mutual Fund | Registration Number: MF/012/94/5
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This article is written by Sudhanshu Asthana, CIO-Equity, LIC Mutual Fund.
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