India races to reform financial sector as foreigners pull $17 billion

MUMBAI: Rattled by nearly $17 billion in foreign outflows this year, India is doubling down on financial sector reforms in a push to beef up capital buffers and lift investment in the country amid wider worries about the economic hit from U.S. tariffs.

Several measures to anchor foreign participation and boost credit have already been announced by the central bank and market regulator in recent months. These include quicker pathways for companies to list and foreign funds and overseas lenders to enter and rules that allow corporates to borrow more easily and banks to finance mergers.

Other areas of regulatory easing in India’s $260 billion financial sector are under discussion to be rolled out over the next six-to-12 months, said six regulatory and market sources with knowledge of the matter.

The possible changes include bolstering capital market participation by mom-and-pop investors in smaller towns and further easing banking regulations, said the sources.

The dismantling of decades-old restrictions comes as Prime Minister Narendra Modi pushes for greater economic self-reliance after concerns about the hit to India’s growth from punitive U.S. tariffs unnerved foreign investors.

The sources declined to be named as they were not authorised to speak to the media.

The central bank did not respond to a Reuters request for comment on new possible easing measures. A SEBI spokesperson, in response to Reuters queries, said it has introduced 11 “major reforms” for foreign investors to improve their access to India and enhance India’s global competitiveness.

“There is an increased focus on ease of doing business and the regulatory cholesterol clogging up the financial sector is being cleared,” said Srini Srinivasan, managing director, Kotak Alternate Asset Managers, which manages $20 billion in assets.

CREATING INVESTOR-FRIENDLY ENVIRONMENT

Foreign investors have net sold nearly $17 billion in Indian equities this year, compared with $124 million in inflows in 2024 and $20 billion in 2023. The sell-off has made India the worst-hit Asian market in terms of foreign portfolio withdrawals.

The gradual loosening in India coincides with the initiatives China has unveiled, in recent months, including opening its stock option market to foreign investors and expanding foreign access to its bond repurchase market.

India’s economy is seen growing 6.8% in the fiscal year to March 31, 2026, according to the Reserve Bank of India (RBI) estimates, compared to 6.5% in the previous year, but below the central bank’s “aspirational” growth of about 8%.

The regulatory changes are intended to be pro-business and revive foreign investment and boost growth, the sources said.

Vikas Pershad, a Singapore-based India portfolio manager in the Asia Pacific Equities team at M&G Investments, which manages $443 billion in client assets, said the regulatory easing and strong growth outlook are among the reasons for investors to stay “constructive” on India.

“This year’s concerted efforts to ease certain regulatory requirements … have certainly not gone unnoticed,” said Pershad.

“As long-term investors in India, we believe these steps are meaningful in creating a more accessible and investor-friendly environment.”

FRESH THINKING, CLOSER COORDINATION

The shift comes less than a year after leadership changes at the RBI and SEBI.

Sanjay Malhotra became RBI governor in December and Tuhin Kanta Pandey started as SEBI chief in March.

Both previously worked together in the finance ministry and are focused on reversing years of tight regulation that followed a debt crisis between 2016 and 2018, analysts and insiders say.

In internal meetings this year, Malhotra argued crisis-era rules remained in force long after the shock, likening them to a plaster left on after a fracture healed, according to one source.

Under those changes, banks can now fund acquisitions and lend more against listed debt and equity securities, the central bank announced this month.

Capital buffer requirements for non-bank lenders funding infrastructure have been eased and additional provisions on banks lending to large corporates have been removed.

Long-standing rules limiting lower-rated borrowers from raising debt overseas have also been dismantled.

“The current governor is leaning more towards liberalisation and optimum regulation. Some of these changes are really needed,” said HR Khan, former RBI deputy governor.

SEBI’s focus includes simplifying foreign investor access and encouraging investment from smaller urban areas, two sources said.

“Mutual funds have proven to be the right vehicle to get retail investors from smaller cities into capital markets,” a SEBI spokesperson said, adding that the regulator is increasing access for more such funds.

While financial sector deregulation is positive, it will take deeper reforms to unleash market forces in the Indian economy, said Ian Simmons, Fiera Capital’s London-based senior portfolio manager for global emerging markets strategy.

“The effort towards reviving animal spirits in the private sector comes back to some of the bigger bureaucratic, judicial and tax reforms, geared towards the ease of doing business,” said Simmons, whose firm manages $117.6 billion in assets.