Economically, these changes could reverse the trend of foreign outflows seen in 2025, where geopolitical concerns and high valuations led to record sell-offs.
In a bid to revitalise foreign capital inflows amid recent market outflows, finance minister Nirmala Sitharaman unveiled significant reforms to India’s foreign investment regulations during the presentation of the union budget for the fiscal year 2026-27. The announcements, made in Parliament today, focus on simplifying and liberalising rules under the Foreign Exchange Management Act (FEMA), aiming to make India more attractive to global investors. This comes at a time when foreign portfolio investors have been net sellers in Indian equities, pressuring the rupee and stock markets.
Sitharaman, presenting her ninth consecutive budget, emphasised the government’s commitment to structural reforms for sustained economic growth. “The Reform Express is well on its way and will maintain its momentum to help us fulfil our kartavya,” she stated, highlighting the path toward a ‘Viksit Bharat’ or developed India. The budget proposals include a comprehensive review of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, which govern FDI, portfolio investments, and foreign ownership in Indian firms. This review is intended to modernize the framework, streamline compliance, and align it with evolving global practices, according to experts.
The reforms are seen as timely, given the economic challenges outlined in the pre-budget Economic Survey, which flagged concerns over dwindling foreign capital and subdued private investments. With India’s economy projected to grow at around 7 per cent in the coming year, these changes aim to boost integration into global value chains, enhance ease of doing business, and support strategic sectors.
Key Changes to Portfolio Investment Limits
One of the standout measures is the relaxation of investment caps for Persons Resident Outside India (PROIs) in listed Indian companies. Under the portfolio investment scheme, the individual ownership limit for a single PROI has been raised from 5 per cent to 10 per cent, while the aggregate limit for all PROIs in a company will increase from 10 per cent to 24 per cent. This shift is expected to allow serious foreign individual investors to take more substantial stakes, improving price discovery and fostering long-term capital formation in the equity markets.
Additionally, informed sources say, the government plans to permit individual persons resident outside India to directly invest in equity instruments of listed companies through this scheme, a move that could deepen shareholding patterns and attract high-net-worth global investors. To further strengthen the corporate bond market, a new market-making framework will be introduced, along with access to funds and derivatives on corporate bond indices. Total return swaps on corporate bonds are also on the anvil, aimed at enhancing liquidity and aligning foreign investments with India’s economic priorities.
In the defence sector, easing conditions for foreign investments into units is proposed, potentially including the setup of defence-industrial corridors and an export-promotion council to meet export targets of $5.5 billion by 2029. Larger cities will receive incentives of ₹100 crore for issuing municipal bonds exceeding ₹1,000 crore, building on existing schemes to promote this market.
Expert Reactions and Economic Implications
Industry analysts have welcomed the reforms, viewing them as a step toward greater liberalization. Speaking to India Today, Lokesh Shah, Partner at CMS IndusLaw, noted that the 2019 rules, while consolidating the framework, have become outdated. “The review signals a move toward further liberalisation, providing legal clarity and predictability,” he said.
Arvind Sanger of Geosphere Capital Management urged a focus on supply-side reforms, including addressing double taxation issues for foreign investors without treaties. Deloitte India’s Rumki Majumdar echoed this, stressing the need to enhance productive capacity to sustain growth and attract private investment.
Economically, these changes could reverse the trend of foreign outflows seen in 2025, where geopolitical concerns and high valuations led to record sell-offs. The budget also maintains fiscal prudence, with the deficit targeted at 4.3-4.4 per cent of GDP and capital expenditure hiked to ₹12.2 trillion, signalling continued public investment to complement private inflows.
However, specifics on FDI limits in sectors like defence or manufacturing remain broad, with no immediate changes announced. Implementation timelines are unclear, but the government aims to roll out these reforms swiftly to capitalise on global shifts in investment patterns.
Overall, the budget’s foreign investment overhaul underscores India’s ambition to emerge as a manufacturing hub and export powerhouse. As markets react positively in early trading, stakeholders await detailed guidelines to assess the full impact on economic momentum.
Image: Sansad TV
