As India steps into 2026, the macroeconomic picture appears, at first glance, remarkably encouraging. Economic growth remains strong, with GDP expansion projected at over 7 per cent for FY26 and a healthy 6.5-7 per cent for FY27. Inflation is largely under control, interest rates remain reasonable, and the banking sector is in its strongest shape in over a decade, supported by low non-performing assets and robust corporate credit quality.
Add to this a steadily declining fiscal deficit, a stabilising public debt profile, political continuity, and an increasing emphasis on structural reforms, and the narrative seems overwhelmingly positive.
Yet there are emerging challenges that warrant closer attention.
One concerning trend is the weakening of the Indian rupee, not only against the US dollar but also more sharply against other major currencies. Over the past year, the rupee has depreciated by over 15 per cent against the British pound and the Euro. This has occurred despite a relatively contained current account deficit, indicating that the pressure is not driven by trade imbalances but by capital flows.
Falling FDI
Foreign investment trends paint a sobering picture. Foreign portfolio investors recorded net outflows of nearly $18 billion in 2025, while net foreign direct investment has fallen sharply over the past four years — from $44 billion in FY22 to $28 billion in FY23, $10 billion in FY24, and barely $0.5 billion in FY25.
The pressing question is whether this represents a temporary market phenomenon or a deeper structural issue.
Evidence increasingly points toward the latter. Globally, long-term capital is being redirected toward developed economies, especially the US. Europe and Japan, too, are prioritising domestic investment in response to geopolitical uncertainty, reshoring trends, and strategic industrial policies. For emerging markets like India, this means heightened competition for global capital at precisely the moment when large-scale foreign investment is needed to sustain manufacturing growth and technological upgradation.
At the same time, global trade dynamics are shifting unfavourably. The tariff war of the last year has hardened into economic nationalism. Till just about a year ago, there was optimism that India would secure a favourable trade arrangement with the US and position itself as a major beneficiary of the “China+1” strategy. But now in 2026, this outlook has dimmed considerably. Rather than gaining export market share, India now faces the risk of losing competitiveness as trade barriers rise and supply chains become more regionally concentrated.
Protectionist tilt
Domestically, policy responses also suggest a tilt toward protectionism. Higher import tariffs on sectors such as steel and chemicals are intended to shield local producers from low-cost Chinese imports. While such measures may offer short-term relief to domestic industries, they also risk reducing competitiveness and limiting India’s integration into global value chains. The positive impact of the multiple Free Trade Agreements (FTAs), that India is signing is yet to be seen.
The broader concern is that India may be drifting toward a version of self-reliance that prioritises insulation over integration. ‘Atmanirbharta’, if pursued without a strong export strategy and global market access, risks becoming inward-looking. Economic history shows that large, fast-growing economies do not achieve prosperity by turning away from trade and foreign capital but by leveraging them to scale domestic capabilities.
India’s growth hinges not only on strong domestic fundamentals but also on its ability to attract long-term investment and compete effectively in global markets. While India’s growth story remains intact for now, the warning signs — weak capital inflows, currency pressures, and rising trade barriers — call for a careful recalibration of economic strategy.
The writer is Chief Rating Officer & ED at CareEdge Ratings. Views are personal
Published on January 21, 2026
