RBI Reframes Signals from Capital Flows

In the post-policy press conference following the latest Monetary Policy Committee review, the Reserve Bank of India’s messaging on capital flows revealed a layered yet contrasting reading of the data. Deputy Governor Poonam Gupta pointed to improvements in entry conditions for investors, citing more attractive valuations, a supportive exchange rate, and strong nominal GDP growth. Governor Sanjay Malhotra, for his part, framed foreign portfolio investment flows as inherently short-term and opportunistic, suggesting that such movements should not be over-interpreted in assessing India’s underlying investment appeal.

Between Gupta’s improved entry-point argument and Malhotra’s characterisation of FPI flows as transient, the RBI presents not a single view of capital flows, but arguably a hierarchy of relevance. Portfolio outflows are treated as noise, while FDI and growth fundamentals are positioned as signals.

This is not a shift in policy preference, because the central bank has no ability to choose the composition of flows, but a deliberate attempt to shape how markets read a data set that is, at present, uncomfortably mixed.

Foreign portfolio investors have pulled out $19.7 billion from equities during 2025-26, with early April already seeing an additional $5.0 billion in equity outflows and $1.5 billion in debt outflows. External commercial borrowings have moderated to $11.9 billion from $16.0 billion a year earlier, while non-resident deposit inflows have eased to $11.0 billion from $14.6 billion. At the same time, the external debt-to-GDP ratio has edged up to 20.4%, even as the net international investment position has improved to (-)7.1% of GDP from (-)9.0%.

Malhotra suggests that this is not a picture of stress, but neither is it one of unambiguous comfort.

By contrast, the FDI narrative is distinctly stronger. Gross FDI flows have risen by 18.1% to $88.3 billion in April–February, with net inflows improving to $6.3 billion from $1.5 billion a year ago. Greenfield announcements remain sizeable at $65 billion, led by large commitments from global technology and financial firms. The signal here is one of pipeline continuity and longer-duration capital, even if the pace of announcements has moderated from the previous year.

In recent months, the government has indicated a calibrated easing of investment restrictions for neighbouring countries under Press Note 3, particularly in sectors where domestic capacity and supply chains remain reliant on external inputs. Any relaxation, especially for Chinese investments, could support incremental inflows into areas such as telecommunications equipment, chemicals, electronics manufacturing, and renewable supply chains.

It is within this divergence between FDI and FPI that the RBI’s communication is best understood.

Entry Point
Gupta’s intervention on FPI, when invited to speak on remittances from overseas Indians, is largely directed at the marginal investor. Valuations have corrected, the exchange rate has adjusted, and nominal GDP growth remains supportive of earnings. The argument is cyclical and forward-looking, that the entry point into India has improved, and that flows should respond as relative attractiveness normalises. This is an apparent counter to the prevailing narrative of expensiveness and rotation into other markets.

Malhotra’s formulation operates at a different level. By emphasising that FPIs seek short-term opportunities across jurisdictions and that such flows are inherently volatile, he is not contesting the outflows. He is arguably attempting to reduce their informational weight. The emphasis shifts instead to macroeconomic fundamentals, policy continuity, demographics and financial stability, factors that underpin longer-duration capital such as FDI. The suggestion may not necessarily be that FPIs will not return, but that their timing is neither predictable nor particularly relevant to the macro narrative.

The RBI cannot engineer FDI inflows, just as it cannot prevent FPI outflows. It also cannot explicitly privilege one form of capital over another. What it can do, and is doing, is to anchor expectations around the components of the external account that are more stable and policy-consistent, while treating more volatile elements as episodic.

That framing, however, may also reflect the limits of policy control rather than a clear strategic preference. The central bank appears to be working with a data set in which the more stable components are currently stronger, while the more volatile components are weaker. Emphasising one over the other may therefore be as much a function of circumstance as of communication strategy.

The underlying constraint is not flows in isolation, but their interaction with the broader macro framework. Persistent FPI outflows, if accompanied by foreign exchange intervention, can drain liquidity in the banking system and tighten financial conditions. Moderating inflows from external commercial borrowings and deposits reduces the buffer available to absorb such shocks. In that context, the strength of FDI and the absence of stress in the balance of payments allow the RBI to maintain distance from short-term volatility in flows.

The communication strategy, therefore, appears to rest on a set of implicit assumptions: that the external account remains manageable, that reserves are adequate to smooth exchange-rate movements, and that liquidity conditions do not inadvertently tighten through intervention. As long as these conditions hold, portfolio flows can reasonably be treated as secondary within the broader macro narrative.

For now, the RBI’s messaging may be better read as an attempt to stabilise interpretation rather than assert control. It is not about choosing between FPI and FDI, but about selectively emphasising the components of the data that align with macroeconomic stability while downplaying those that introduce volatility. Whether that balance holds will depend less on communication and more on how the underlying flow dynamics evolve.