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Indian companies are expected to allocate $45–50 billion annually for capital expenditure over the next two years as the investment cycle picks up momentum on the back of robust corporate earnings, according to a Moody's Ratings report released on Tuesday.  

Moody’s expects Indian companies to invest in new capacity to meet increasing demand for consumption goods, with a large proportion of their capex being funded through internal cash flows.

Investments to increase vertical integration and achieve net zero targets will also drive up investments, the report states.

"Capex by corporate sectors in India and Indonesia will remain high over the next two to three years. Overall capacity utilisation for the manufacturing sector in both countries is already quite high, while consumption continues to grow on the back of population growth and a favourable demographic profile," the Moody's report states.

The global rating agency expects companies in the automotive, metals and mining, technology, media and telecommunications sectors to account for around one-third of total capex, with investments of around $15-16 billion each year.

Companies in the oil and gas sector are expected to invest 60 per cent of the total capex.

What will support the earnings of these companies across sectors will be infrastructure spending, increasing domestic energy consumption, and rising demand for connectivity, Moody’s said.

Government policies aimed at pushing up the growth rate of the manufacturing sector are seen as another driver of capex. The government's promotion of manufacturing as a basis for economic development and job creation will support capacity expansion and continued capex over the next few years, the report said.

While improving the domestic liquidity and internal cash flows of Indian companies can cover a portion of their capital needs, funding through offshore channels will remain an important route.

Meanwhile, the gross foreign direct investment (FDI) flowing into the Indian economy has surged by 26.4 per cent to $22.5 billion during the April-June quarter of the current financial year compared to the same quarter of the previous year, according to the RBI’s latest monthly bulletin. This has resulted in net FDI during the first quarter of 2024-25 shooting up to $6.9 billion during the first quarter of 2024-25, compared to $4.7 billion in the same period of 2023-24, the report states.

Manufacturing, financial services, communication services, computer services, and electricity and other energy sectors accounted for about 80 per cent of the gross FDI inflows.