Series 127 – FII vs FDI flows in India – Trend and Key Implications

1. FII = Sentiment, FDI = Strategy

• FII flows are volatile, driven by global liquidity, USD strength, valuations, and risk sentiment.
• FDI flows are structural, driven by India’s market size, reforms, supply-chain shifts, and long-term growth opportunities.

2. Why currency matters differently

• FII returns are marked to USD → INR depreciation erodes returns, triggers exit. (People look at yearly returns)
• FDI strategy focuses on market access, local production, and reinvestment → depreciation can even be beneficial (cheaper cost base in USD terms). -> when you don’t need to MTM ur assets

3. Repatriation vs FII outflows

• FII exits are sharp and cyclical (FY12, FY20, FY22).
• FDI repatriation has historically been stable and modest (10–30% of gross inflows).
• This divergence showed that short-term “hot money” exits did not mean long-term investors lost conviction in India.

4. Ratios tell the story

• Historically, Net FDI retained 40–60% of gross inflows every year.
• Repatriation was relatively contained, meaning India was “sticky” for strategic investors.

5. The recent shift (FY24–FY25)

• Repatriation surged to ~62–64% of gross inflows.
• Net FDI collapsed → only ~14% of gross in FY24, and almost negligible (~1%) in FY25.
• Suggests a phase of capital recycling — strong inflows, but equally strong exits (likely PE/VC monetisations, sectoral churn).

6. Key implications

• FIIs: Still a barometer of short-term sentiment — useful for risk-on/off signals.
• FDI: Traditionally the structural anchor, but recent repatriation spikes mean we must watch if this is cyclical (exits after long holding periods) or structural (confidence ebbing).

 

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