Policy Rates and Structural Reforms in Shaping the Episodic Behaviour of Foreign Direct Investment in India

Abstract

India has emerged as one of the global leaders in attracting foreign direct investment (FDI) inflows, recording a record high of USD 84.83 billion in FY2024. However, it is still ambiguous whether monetary policies, such as the RBI repo rate, have a major impact on FDI inflows since the reforms began. In this study, the relationship between RBI repo rate and FDI inflows is examined using a sample of 26 annual observations from 2000 to 2025. The study uses multiple OLS regression models and includes five macroeconomic variables such as the RBI repo rate, real GDP growth, CPI inflation, INR/USD exchange rate, and growth of broad money supply (M3). Three directional hypotheses are tested using Keynesian investment theory, cost of capital theory, and Mundell-Fleming trilemma. The model explains 72.1 percent of FDI inflows (R² = 0.721, Adj. R² = 0.652, F = 10.349, and p < 0.001). None of the three hypotheses was able to achieve a 5 percent significance level. The robust check of the model using first differences also confirmed the absence of a significant relationship. The correlation analysis of the last 8 years revealed a negative relationship between the RBI repo rate and FDI inflows, especially during the reform and monetary easing period from 2013 to 2019. The most important factor contributing to FDI growth in India over the last 25 years has been structural reforms and improvements in institutions rather than monetary policies. The RBI repo rate and other monetary policies are not reliable tools for maintaining FDI inflows into India. The most reliable tools include maintaining the credibility of policies, reform momentum, and exchange rate policies to sustain FDI inflows into India within the framework of Viksit Bharat @ 2047.