Gains from decontrol: Removing constraints offers substantial gains

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 inflows of foreign direct investment (FDI) were not looking good. Global corporations in manufacturing 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 in Indian banks and non-banking financial companies (NBFCs) surged, culminating in deals estimated at approximately $11 billion for the calendar year. Net FDI into India has been stuck for over a decade. Yet, owing to certain changes in rules, a significant volume of capital entered financial firms in the country in a single calendar year. Such is the power of capital account decontrol. The inflow seen here in one field — $11 billion— is a strong value compared with the net FDI in India for the full 2024-25 of $29 billion. 

Policymakers 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 investment 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 licence but needed a licence 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. On September 23, SMBC invested $1.6 billion for a 24 per cent stake in Yes Bank. On October 2, IHC acquired a 43.5 per cent in Sammaan Capital (formerly Indiabulls Housing Finance) for $1 billion. On October 18, Emirates NBD paid $3 billion for a controlling stake of 60 per cent in RBL Bank. On October 24, Blackstone invested $0.7 billion for a 10 per cent stake in Federal Bank. Finally, on December 22, MUFG injected $4.4 billion for a 20 per cent 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 in the Indian landscape. These revitalised firms, armed with cheaper capital and better technology, will compete aggressively with 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 signalled its approval, with average excess returns (compared with the Nifty) for four target companies in the month after the transaction of 16.9 per cent. 

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 transactions on FDI 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 (https://mybs.in/2eqm3Zv?1767531700), in recent years, household savings have fared poorly: From 22.7 per cent of gross domestic product (GDP) in 2021 to 18.1 per cent in 2024. This will hamper domestic investment unless restrictions are removed so as to give access to plentiful and low cost foreign capital. The $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. 

The events of 2025 are a nice illustration. We removed some restrictions, and billions of dollars flowed in to strengthen our financial system. And this is 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. 

The author is a researcher at the XKDR Forum