Economic liberalization started during the last two decades of the Twentieth Century was really a revolutionary step in the direction of encouraging foreign investments in India. FDI helped a lot to improve the position of India’s foreign exchange. Foreign investors have found in India a new haven for investments. The role played by FDI in a developing country like India is very important. Although the liberalization of trade policies have developed India by ways of generation of employment opportunities, development of backward and geographically disadvantaged areas, development of infrastructure, generation of revenue from taxes etc. Main objective of this study is to study the need for FDI in India and the issues and challenges that FDI possesses for the Indian Economy and to suggest the ways in which the foreign investment flows can be increased into the country.