Foreign Portfolio Investment (FPI) allows investors from abroad to buy Indian stocks and bonds without owning or managing the company. The inflow of foreign capital is an important source of market liquidity. However, people often call it hot money because it moves in and out quickly based on global news.
In this blog, we will explain Foreign Portfolio Investment (FPI) and why it matters to India. We also cover its various categories, how it differs from FDI, and recent market examples.
Table of Contents:
What is Foreign Portfolio Investment?
Foreign Portfolio Investment (FPI) is when an investor from another country buys Indian financial assets like shares, bonds, or mutual funds. Investors treat FPI as a passive investment. They aim to earn a profit from the market without actually running the company.
The Securities and Exchange Board of India (SEBI) regulates all FPI investors in India. When FPI money enters the Indian market, it can boost liquidity and push share prices up. This helps Indian companies to raise capital more easily. These investments bring in foreign currency, which supports the Indian Rupee and overall economic growth.
Importance of Foreign Portfolio Investment in the Indian Economy
Foreign Portfolio Investment plays a key role in the Indian economy because it provides capital that businesses need to grow and expand. Here is why it matters:
- Boosts Capital: FPIs invest in Indian stocks and bonds, which gives companies funds to start new projects and create jobs.
- Supports Market Growth: Constant foreign investment helps the Indian stock market grow and raises overall economic growth.
- Connects India to Global Markets: FPI connects the Indian market with the global economy and global investment standards and governance expectations.
- Reduces Funding Costs: More capital from abroad makes it cheaper for companies to raise money for daily operations and expansion.
FPI also increases market volatility. Since these investments are short-term, investors may sell off their holdings quickly during global shocks. This is why the Indian government and SEBI work to maintain stable policies that sustain investor confidence.
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Categories of Foreign Portfolio Investment
SEBI makes foreign investor registration easier by grouping investors into two main categories based on their risk profile. Here are the categories:
Category I: This category includes highly regulated and government-backed investors. It covers:
- Government Sector: Central banks, sovereign wealth funds, international agencies.
- Heavily Regulated Entities: Pension funds, university funds, and banks from Financial Action Task Force (FATF) member countries.
These investors face the lowest KYC requirements. They can also issue and invest in Offshore Derivative Instruments (ODIs). This is subject to SEBI conditions.
Category II: This category includes all eligible investors who do not qualify for Category I.
- Who it includes: Corporate bodies, family offices, individuals, charitable organizations, and unregulated funds like limited partnerships.
SEBI moved many investors from the earlier Category III into this category to reduce the compliance burden.
GS-FPI Framework: SEBI introduced a special framework for FPIs investing only in Government Securities FPIs (GS-FPIs). These investors invest only in Indian government bonds. SEBI has relaxed disclosure rules for them and simplified reporting requirements to attract long-term investment into India’s debt market.
Role of Foreign Institutional Investors (FIIs) in FPI
You may still hear news anchors and newspapers use the term Foreign Institutional Investor (FII), but India no longer uses it as an official category. SEBI first introduced the unified FPI framework in 2014, later updating it through the 2019 regulations.
Today, “FII” is now only an informal term. The media uses it to describe very large foreign investors within the FPI group. These are big entities such as pension funds, mutual funds, and sovereign wealth funds that invest large amounts of money in the market.
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Difference Between FPI and FDI
Both FPI and FDI bring foreign money into India, but they work in different ways. If a foreign investor buys over 10% of an Indian company, it is usually treated as FDI. Here is the difference between the two:
| Feature | Foreign Portfolio Investment (FPI) | Foreign Direct Investment (FDI) |
| Meaning | Buys financial assets like stocks and bonds. | Buying a large stake or starting a business. |
| Role of Investor | They just want to earn a profit. | They help run the business. |
| Control | The degree of control is very low. No say in how the company is managed. | The degree of control is high. They have a say in business decisions. |
| Time Frame | With short-term investments, investors can sell them quickly. | Long-term investment, which lasts for years. |
| Management | No involvement in managing the company. | Direct involvement in company management. |
Pros and Cons of Foreign Portfolio Investment
Foreign Portfolio Investment (FPI) offers significant benefits to the Indian economy, but it also carries risks.
Pros of FPI
Here are the key advantages:
- Increases Market Liquidity: FPI makes stock and bond markets more liquid. This means it is easier for everyone to buy and sell securities quickly and fairly.
- Develops Equity Markets: Foreign inflows help the stock market grow overall. Companies improve performance, reward stronger corporate governance, and transparency to attract international funding.
- Assists Domestic Markets: Foreign investors bring advanced investment and risk-management practices. This encourages local markets to offer better and more diverse financial products.
- Strengthens Currency: FPIs turn foreign currency into rupees to invest. This increases demand for the rupee and supports its value internationally.
Cons of FPI
Here are the main disadvantages:
- Market Volatility: FPI is often short-term money because investors can exit quickly during a global crisis. This sudden exit can hurt stock prices and weaken the rupee.
- No Management Control: FPI investors are passive. They do not bring advanced technology, management skills, or long-term operational support to local companies.
- Global Shocks: The local market becomes very sensitive to global events. Changes in the USA interest rates, for example, can trigger FPI outflows and disturb the local economy.
Recent Foreign Portfolio Investment Examples in India
To understand FPI, it helps to look at what is happening right now. The market is very different from a few years ago.
Market Highlights of 2025: Record Outflows
In 2025, foreign investors made a significant exit from the Indian stock market. They sold shares worth about ₹1.6 lakh crore in net terms. This happened for two main reasons:
- Interest rates rose in the USA, making American investments safer and more attractive.
- Indian stock prices were very high, so many investors booked profits.
Trends of 2026: Shift Towards Debt
In 2026, foreign investors started shifting focus from stocks to bonds. In early 2026, FPIs made large single-day investments of over ₹7,500 crore in Indian government bonds. They did this because the global index provides a plan to include these bonds in major global indices.
Large global funds and governments are key FPI investors in India. The Government of Singapore remains the top FPI investor. It holds major stakes in banks like HDFC Bank and ICICI Bank. GQG Partners, a large US investment firm, is another major FPI known for its investments in companies like the Adani Group.
This data shows that while stock investors are cautious, large global investors still believe in India’s long-term growth.
Conclusion
Foreign Portfolio Investment (FPI) has significantly transformed the Indian financial landscape over the past two decades. By providing a steady flow of global capital, FPI has made our markets more competitive, liquid, and transparent. While it does bring some volatility, its role in India’s journey toward a multi-trillion-dollar economy is undeniable.
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Frequently Asked Questions
Q1: What is the main difference between FPI and FDI?
The key difference is control and time. FPI is for short-term financial gain with no control over a company’s management. FDI is a long-term investment where the investor takes active control of the business operations, often holding more than a 10% stake.
Q2: Can a normal individual investor participate in an FPI?
Retail individuals generally do not register as FPIs due to high compliance requirements, though eligible high-net-worth individuals can. However, a retail investor in India can easily invest indirectly through mutual funds or ETFs that have exposure to foreign markets or specific foreign securities.
Q3: Is FPI the same thing as "Hot Money"?
Yes, FPI is often referred to informally as “hot money.” This is because the funds can enter and exit the country quickly in response to global events or interest rate changes, causing market volatility.
Q4: Who regulates FPI in India?
FPIs are primarily regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Foreign Portfolio Investors) Regulations, 2019. The Reserve Bank of India (RBI) also manages the foreign exchange aspects under the FEMA (Foreign Exchange Management Act) rules.
Q5: What types of securities can FPIs invest in?
FPIs can invest in a wide range of assets, including listed shares, government securities, corporate bonds, commercial paper, and units of mutual funds or ETFs.