Foreign direct investment inflows into the services sector declined by 47.5 per cent to USD 1.19 billion during the April-August period.
The services sector, which includes banking, insurance, outsourcing, R&D, courier and technology testing, had received FDI (foreign direct investment) worth USD 2.28 billion in the same period last year, according to the data of the Department of Industrial Policy and Promotion (DIPP).
Industry experts say that the government needs to further relax FDI norms to attract investors to the sector.
"Although the government has liberalised norms in the financial sectors, more needs to be done. The outsourcing business of India was impacted due to restrictions by developed economies," said Krishan Malhotra, Head of Tax and expert on FDI at corporate law firm Amarchand & Mangaldas.
The services sector contributes over 60 per cent to India's GDP. In 2012-13, foreign investment in the segment fell to USD 4.83 billion from USD 5.21 billion in 2011-12.
Malhotra said the RBI would soon come out with guidelines on foreign banks, a move which will help in boosting FDI in the sector.
The government is also considering raising the FDI cap in the insurance sector to 49 per cent from 26 per cent.
The other sectors where foreign inflows dipped during the first five months of this fiscal as compared to the previous year include construction development (township and housing), power and metallurgical industries.
Overall, during the April-August period, FDI has grown by only 4 per cent to USD 8.46 billion, from USD 8.16 billion in the same period last fiscal.
Foreign investments are considered crucial for India, which needs around USD 1 trillion in the next five years to overhaul its infrastructure sector such as ports, airports and highways to boost growth.
Decline in foreign investments could affect the country's balance of payments (BoP) situation and also impact the rupee.