Veteran investor Shankar Sharma has voiced significant caution regarding the stability of India's foreign direct investment (FDI) inflows, asserting that a substantial portion, estimated at 70-75%, comprises venture capital (VC) and private equity (PE) money. Sharma contends that this type of capital is inherently unstable and should not be considered long-term investment, challenging the prevailing narrative that strong gross FDI numbers alone signify robust investment attractiveness.
FDI Composition Concerns
In a detailed post, Sharma highlighted that many observers overlook the true composition of India's FDI. He described VC/PE capital as "completely frisky and promiscuous," emphasizing its short-term, exit-driven nature. This perspective contrasts with arguments from figures like RBI Governor Sanjay Malhotra and economist Arvind Panagariya, who maintain that gross FDI figures, which reached nearly $94 billion in FY26, accurately reflect India's appeal to global investors.
The debate intensified following a 96% plunge in India's net FDI in FY25. While proponents of the government's stance point to healthy gross inflows, Sharma argues that the composition of these inflows matters critically. He noted that VC/PE investors ultimately seek exits through capital markets, meaning today's inflows can become much larger outflows in the future.
The Exit Strategy and Market Impact
Sharma illustrated this point by suggesting that $50 billion in VC/PE inflows today could translate into $110-125 billion in exits five to eight years later, assuming a 12% annual compounding rate in dollar terms. He warned that a prolonged bear market in Indian equities could severely impact future gross FDI inflows, as the path to profitable exits is crucial for VC/PE funds. "They will not commit more capital to a country with poor equity markets. So our FDI is entwined with our FII and equity markets," he stated.
Sharma also dismissed the notion that manufacturing investments are always "sticky" capital, citing examples of established manufacturing companies that have exited India.
India's Forex Reserves and FII Outflows
Beyond FDI, Sharma also addressed the ongoing discussion about India's foreign exchange reserves and import cover. He challenged the use of net imports as a measure of reserve adequacy, arguing that it understates risk. According to Sharma, import cover must assess a country's ability to meet all necessary import payments if forex inflows cease, requiring reserves to cover gross bills, not just net differences after export receipts.
He emphasized that imports represent actual foreign-currency obligations that must be paid in full, irrespective of when export receipts arrive. Using net imports, he cautioned, could create a false sense of security, contrasting with the conservative liquidity metrics traditionally used by central banks and institutions like the IMF.
Sharma further flagged continued foreign institutional investor (FII) selling, noting that FIIs offloaded equities worth ₹8,362.92 crore on a single day. In 2025, FIIs were net sellers of Indian equities worth ₹1.66 lakh crore (approximately $17.7 billion), marking the largest annual outflow on record. By May of the current year, they had sold an additional ₹2.06 lakh crore (roughly $21.9 billion). Sharma concluded by noting that FIIs still hold a significant $750-850 billion in Indian markets, which he stated is more than 100% of India's "rented FX reserves."