FPIs: Must India always play by their rules?

In the real economy, India continues to be among the fastest-growing countries, with its growth projections endorsed by international agencies such as the World Bank and IMF. Government tax and non-tax revenues have broadly tracked budget expectations. High-frequency indicators also support the growth story. Year-on-year sales of two-wheelers, passenger vehicles and tractors, reflecting rural demand, rose by 33%, 22% and 13%, respectively, year-on-year as at September 2026. These figures reflect actual sales.

The contribution to the weakness in the stock market has undoubtedly come from Foreign Portfolio Investors (FPIs). Their net withdrawals exceeded ₹3.08 lakh crore in FY 2026-27, against ₹1.66 lakh crore in the previous year. Yet, India's outstanding FPI investments remain substantial, at around ₹74 lakh crore, with the deployment in financial services stocks alone being nearly ₹20 lakh crore.

FPI flows are inherently volatile. Investors seek to time markets and exit when their profit objectives or risk assessments change. Unlike Foreign Direct Investment (FDI), portfolio investments are not necessarily long-term commitments. Though both form part of the “capital account”, their economic implications are very different.

China, India's economic competitor, offers an interesting contrast in managing portfolio flows. India has been relatively liberal in allowing foreign portfolio investments since opening its markets in 1992. China, on the other hand, has maintained a more interventionist framework, including specific foreign-exchange and repatriation controls. Its approach to market violations is also considerably tougher, with criminal proceedings being pursued in serious cases.

India's regulatory philosophy is benign. SEBI permits “settlement” of certain regulatory proceedings through monetary payments without admission or denial of guilt. In a prominent insider-trading matter in 2021, an investor and associates reportedly settled proceedings by paying approximately ₹35 crore without admitting or denying the allegations.

This raises an uncomfortable question. Why should violations of market regulations by financially powerful entities be capable of being settled through monetary payments without admission of guilt, when ordinary citizens face criminal prosecution for relatively routine financial offences? A cheque issued without sufficient funds, for instance, can attract criminal prosecution and imprisonment. There is an ethical dimension to this disparity. Sometimes, it appears that money can make even serious regulatory violations being “settled”. If this is a voluntary adoption of the US structure, India need not unquestioningly imitate “Western” regulatory practices. This sits uneasy with the country’s approach in the case of other transgressions in the financial sector. The “settlement” method can potentially facilitate a culture of “accommodation” of the high and mighty in the capital markets.

The key question is whether FPIs should receive a treatment with kid-gloves. Several developments merit consideration in this regard.

First, while FPIs have been withdrawing, gross FDI inflows have remained robust, at $81 billion in FY 2024-25 and $95 billion in FY 2025-26. Major investments reported recently include Sumitomo Mitsui's investment in Yes Bank, Emirates NBD's proposed investment in RBL Bank and Fairfax's investment commitment in IDBI Bank. These reflect a different, and arguably more durable, form of foreign investor confidence in India.

Second, FPI withdrawals have affected both equity markets and the foreign-exchange market. The RBI and SEBI have nevertheless managed the pressures through timely interventions. Whether through coordinated timings or otherwise, portfolio flows can accelerate depreciation of the home currency.

Third, domestic investors are increasingly capable of cushioning foreign withdrawals. The Indian mutual fund industry's assets under management have risen by approximately 22% during 2024-26, from ₹66 lakh crore to ₹82 lakh crore. Domestic savings and institutional participation provide an important counterweight to foreign portfolio selling.

This does not mean that FPIs are unimportant or that India should close its doors to them. But we should distinguish between attracting productive, long-term capital through FDI and being soft on short-term portfolio investors through FPI.

The Government is reportedly considering concessions in capital gains taxation, while demands for greater disclosure of beneficial ownership by FPIs have also generated debate. Policy concessions designed primarily to reverse portfolio outflows deserve careful scrutiny.

India's GDP, market capitalisation, domestic investor base and institutional strength provide considerable resilience. We should not let daily headlines about thousands of crores of investor wealth being wiped out dictate long-term economic policy. That is a clear instance of the media going over the top.

Markets also create wealth, but we rarely see a headline celebrating investors becoming richer by ₹6 lakh crore (the increase in market cap from an 800-point rise in the Sensex).

India is in this game for the long haul. We need cold pragmatism, not anxiety about every foreign investor's next move. China offers lessons about approach towards FPIs worth examining. Against the backdrop of our economy's broader parameters, we can lay down a few original rules. We need not always be rule-takers from the West.