India’s growth outlook faces pressure in Modi’s third term as foreign investors scale back

Prime Minister Narendra Modi, entering his third term at the helm of India’s federal government, is confronting what investors and analysts describe as the most difficult external test yet for the country’s growth narrative. In reporting on market conditions, CNBC cited data showing foreign portfolio investors have sold Indian equities worth about $29.5 billion so far in 2026, compared with $18.9 billion in all of 2025, a shift that suggests global capital has become more selective even as India’s economy remains one of the fastest-growing in the world.

The investment pullback is occurring alongside headwinds that can affect consumer spending and business planning. CNBC attributed those pressures to weaker consumption, fragile investment sentiment, higher energy costs, and a broader tendency for global investors to be more selective when deploying capital. The report also pointed to the impact of the prolonged conflict in the Middle East on energy and the Indian economy, while noting that India’s reputation has also been influenced by international concerns about artificial intelligence and related trade practices.

Beyond the macro backdrop, the question of how quickly policy changes are being delivered has also come into view. CNBC reported that the Modi government has finalized only 2 out of 30 reforms over two years, citing data from the Center for Strategic and International Studies. The same reporting said the “reform express” theme is being tested by the friction between stated priorities and finalized measures, a gap that can matter to investors tracking regulatory execution rather than announcements.

On foreign investment more broadly, CNBC distinguished between gross inflows and net figures. The report said India had attracted gross capital of over $90 billion on a 12-month trailing basis ending January 2026, an increase of about 13% year-on-year. However, it also said those inflows were “eclipsed” by higher repatriation by foreign firms and more overseas investment by Indian companies, leaving net foreign direct investment at a near all-time low. The divergence between gross and net flows is significant because it affects currency stability and the availability of domestic funding for new projects.

Analysts also tied the investor reassessment to what they described as a change in the international framing of India’s growth trajectory. CNBC quoted Alexandra Hermann Prasad of Oxford Economics as saying India is “no longer the obvious, one-way growth story investors assumed it was a few years ago,” while adding that the economy “remains strong by global standards.” The report linked the shift to a combination of macro constraints, energy pressures, and changes in global risk appetite.

As Modi’s third term proceeds, the central issue is how quickly the government can narrow the gap between planned reforms and finalized implementation while stabilizing the economic inputs that influence household demand and corporate investment. In practical terms, that means attention to policies that affect energy costs and currency conditions, as well as measures that translate into completed regulatory changes that investors can count on when evaluating costs, timelines, and long-term risk. Separately, analysts and media have also described a more complicated reform path in the period ahead as geopolitics and the global economy fragment further, potentially increasing the difficulty of sustaining investment momentum. The next movement to watch will be whether finalized reforms accelerate and whether capital flows stabilize after the year’s reported equity outflows.

If you are publishing this internationally, consider adding a brief note on how foreign portfolio flows differ from foreign direct investment and why net inflows may matter for funding conditions. That distinction, reflected in the reporting cited above, is part of the reason investors appear to be focusing not only on growth rates but also on the durability and deliverability of policy and macro stability in Modi’s third term.