India Accelerates Capital Liberalization and Diplomatic Pacts Amid Global FDI Decline
SDG 9: Industry, Innovation, and Infrastructure | SDG 17: Partnerships for the Goals
Institutions: Ministry of Finance | Reserve Bank of India (RBI) | Department for Promotion of Industry and Internal Trade (DPIIT)
The Thirty-second OECD/UNCTAD report on G20 Investment Measures documents that global Foreign Direct Investment (FDI) flows continued their decline in 2024, falling below pre-pandemic levels due to overlapping crises. In this context, India recorded moderate gains in FDI inflows during the first half of 2025 compared to the previous semester. Notably, India introduced no new FDI-specific or national security-related investment measures during the reporting period.
India’s policy focus centered on significant liberalization of capital flows and market deepening through the Reserve Bank of India (RBI):
Rupee Internationalization & Debt: The RBI permitted foreign investors using Special Rupee Vostro Accounts (SRVAs) to invest surplus rupee balances into Central Government Securities, including Treasury Bills. The Foreign Exchange Management Act was also amended to allow authorized dealer banks to open SRVAs for foreign banks without prior RBI approval, processing cross-border payments for trade with India.
FPI Liberalization: The RBI substantially raised the total Foreign Portfolio Investor (FPI) debt investment limit for FY 2025-2026, reaching INR 14.70 trillion for the second half of the fiscal year. Furthermore, restrictions on FPI corporate debt investment—specifically short-term investment and concentration limits—were withdrawn.
Green Finance & Reclassification: The RBI included 10-year sovereign green bonds in the Fully Accessible Route (FAR) for non-resident investment. An operational framework was also introduced allowing FPI holdings exceeding the 10% threshold to be reclassified as FDI.
Diplomatically, India concluded a new Bilateral Investment Treaty (BIT) with Israel during the reporting period. India now has a total of 31 International Investment Agreements (IIAs).
India’s policy activity strategically shifts reliance from volatile FDI to stable debt and trade-generated rupee investments by accelerating financial liberalization. By easing FPI restrictions on debt and creating clearer paths for FPI-to-FDI reclassification, the RBI is building resilience in its capital account to better withstand the intensifying geopolitical and economic fragmentation observed globally. The inclusion of sovereign green bonds in the FAR aligns this capital attraction strategy with national sustainability goals.
What is the significance of the RBI’s liberalization of the Special Rupee Vostro Accounts (SRVAs)?→ The SRVA framework allows foreign banks to open accounts in India for international trade settlement in Indian Rupees (INR) without prior RBI approval. The key policy step was permitting foreign investors to invest their surplus INR balances from trade settlements into Central Government Securities. This crucial measure supports the internationalization of the rupee by providing an attractive, stable investment avenue for INR generated through cross-border trade, thereby linking India’s trade objectives directly with its financial market depth.
Follow the full update here: OECD/UNCTAD report on G20 Investment Measures