Gains from decontrol

Business Standard, 5 January 2026

The path to prosperity for India lies in becoming an open market economy, one that is deeply engaged with the world. At present, there is a maze of restrictions at the border which hampers this engagement. The Indian state has created intrusions -- capital controls, customs procedures, sector-specific prohibitions, problems in payments, procedural overhead -- that tie down people trying to find opportunities across the border. These restrictions may be born of a desire for control or a fear of volatility. By making it difficult to transact with the world, we harm our own interests.

It is remarkable to observe how influential the removal of these restrictions can be. When we dismantle even one barrier, the economic response is often swift and substantial. A striking divergence in the economic data of 2025 offers a case study of this mechanism.

The macroeconomic backdrop for India in 2025 was mixed. By October 2025, net FDI inflows were not looking good. Global manufacturing corporations are exercising caution regarding long-term commitments to India, despite the "China+1" narrative. The friction of doing business in the physical economy remains a deterrent.

While factories faced headwinds, Indian finance gained ground in the eyes of global strategic capital. In 2025, FDI into Indian banks and Non-Banking Financial Companies (NBFCs) surged, culminating in deals estimated at approximately USD 11 billion for the calendar year. Net FDI into India has been stuck for over a decade. Yet, owing to certain rule changes, a significant volume of capital entered the country in a single calendar year into financial firms. Such is the power of capital account decontrol. The inflow seen here in one field -- USD 11 billion -- is a strong value compared with the net FDI in India for the full 2024-25 of USD 29 billion.

Policy makers appeared to recognise that the domestic banking system, which faces moderating household financial savings, required external capital. On January 20, 2025, the Reserve Bank of India (RBI) issued the Master Direction on Foreign Investment in India. This document rationalised the norms for foreign entry and reduced the ambiguities that had previously added friction to cross-border transactions.

The new directions offered clarity on downstream investments by Foreign-Owned or Controlled Companies (FOCCs), streamlining equity swaps and deferred consideration mechanisms. Crucially for the shadow banking sector, the regulator permitted Indian entities to receive foreign investment to meet `Minimum Net Owned Fund' (NOF) requirements prior to registration. This resolved a procedural hurdle where firms previously needed capital to get a license but needed a license to get capital. Additionally, the harmonisation of definitions regarding control and beneficial ownership eased compliance for strategic investors. Beyond the text of the regulations, there was a perceptible shift in the supervisory approach. The RBI's approval of majority stakes, such as the Emirates NBD acquisition of RBL Bank, suggests a new pragmatism.

The world responded to these removals of friction with a series of big transactions involving long-term strategic integration:

  1. On Sept 23, SMBC invested USD 1.6 billion for a 24% stake in Yes Bank.
  2. On October 2, IHC acquired a 43.5% stake in Sammaan Capital (formerly Indiabulls Housing Finance) for USD 1 billion.
  3. On October 18, Emirates NBD paid USD 3 billion for a controlling 60% stake in RBL Bank.
  4. On October 24, Blackstone invested USD 0.7 billion for a 10% stake in Federal Bank.
  5. Finally, on December 22, MUFG injected USD 4.4 billion for a 20% stake in Shriram Finance via a primary infusion.

In this group of transactions, we are seeing important global financial firms getting involved in improving Indian financial firms.

Finance is the brain of the economy. It allocates resources to their most productive uses. These transactions make the Indian financial system healthier. By removing barriers at the border, we have allowed the brain to upgrade its processing power. The recipient financial firms benefit from a combination of growth capital, improved governance, better processes, and better production of cross-border financial services.

These transactions create a virtuous cycle of competitive pressure by fielding stronger players into the Indian landscape. These revitalised firms, armed with cheaper capital and better technology, will compete aggressively against public sector incumbents and weaker private firms. This competition forces the entire industry to become more efficient, which is a net positive for the Indian economy. The stock market has signaled its approval, with average excess returns (compared with Nifty) for four target companies in the month after the transaction of 16.9%.

The story is unlikely to end with these five transactions. Some private financial firms might evaluate this environment, anticipate the emergence of a more difficult competitive environment, and be more receptive to raising equity capital. Some global players may notice the opportunities that have opened up through Indian capital account decontrol. Hence, we may see more such FDI transactions in the future.

There is a connection between the weakness of household savings in India of recent years, and the need for capital account decontrol. As Harsh Vardhan and Amrita Agarwal have emphasised, in recent years, household savings have fared poorly: from 22.7% of GDP in 2021 to 18.1% in 2024. This will hamper domestic investment, unless restrictions are removed so as to give access to plentiful and low cost foreign capital. The USD 11 billion inflow in 2025 into one narrow group of firms demonstrates that foreign savings are available, when we remove the restrictions at our end.

We removed some restrictions, and billions of dollars flowed in to strengthen our financial system. Now, the policy shifts that created conditions for these events may have been motivated by other objectives also: To respond to FDI weakness, to grow economic ties with countries other than the US. At the same time, this story shows us the possibilities for how India can obtain gains by cutting away at the thicket of restrictions at the border. The facts shown here are just one area! There are hundreds of such rules hindering activities across the border. It is in our interest to systematically identify and remove these frictions. When these constraints are reduced, the gains are substantial.

Back up to the media page for the year
Back up to Ajay Shah's home page