Summary of this article
FPIs have bought Rs. 27,567 crore so far in FY26 in debt while selling equities, according to NSDL data
FPIs see good value in Indian government securities
Hopes that Indian bonds will be included in global bond indices drive in flows from FPIs
Foreign portfolio investors have mostly turned cautious towards India due to the turmoil in international markets. However, despite outflows seen in most segments, debt continued to garner inflows on hopes of the India bond inclusion story.
So far in the current financial year, FPIs have taken out a net of Rs. 1326 crore from Indian markets, according to data from National Securities Depository Ltd. A major part of these outflows is seen in the equity or related securities segment. However, on the debt side, FPIs have net bought Rs. 27,567 crore worth of securities during the same time.
On Tuesday, a report by Business Standard said major FPIs have given a thumbs up to India’s inclusion in the Bloomberg Global Aggregate Index. The report said that a final call on the matter will be taken by January. In September, Bloomberg Index Services sought investor feedback on whether Indian G-secs should be included in its flagship index. Depending on the weightage, if Indian bonds are included in the flagship Bloomberg index, it is expected to bring in higher foreign inflows than seen before.
JP Morgan was the first global index to include Indian bonds in its Government Bond Index – Emerging Market. According to reports, this inclusion was expected to have garnered around $20 billion -$30 billion worth of investments into Indian G-secs. Inclusion of Indian bonds into the Bloomberg EM Local Currency government index is expected to have brought in around $2 billion-$3 billion of flows into India. Inclusion of Indian bonds into FTSE Russell’s Emerging Markets Government Bond Index, which began in September, is also expected to garner roughly $3 billion worth of bond buys from overseas investors.
“Maybe closer to the date of announcement, you will see some more frontrunning (by FPIs), we also saw that before the JP Morgan inclusion,” Gaura Sengupta, chief economist at IDFC FIRST Bank, said. “India is also a good destination compared to some other EMs (emerging markets), such as Indonesia and gives better returns...You (a foreign investor) are also getting a good currency return.”
India has seen foreign inflows despite the global turmoil due to attractive bond yield levels that the country offers compared to other emerging market economies. For foreign investors, the relative bond yields earned from India against a safe-haven security have drawn in investors looking to generate long-term returns.
Currently, the 10-year Indian government bond generates a yield of 6.53 per cent, slightly higher compared to 6.14 per cent for Indonesia’s benchmark bond of similar maturity. This makes for a higher interest rate differential between the 10-year treasury yield of the US and the emerging market bond yield, making it attractive for FPIs to invest in the latter.
Foreign investors looking for long-term investments are also getting a good entry point into India, as the rupee has hovered around 88.60 to a dollar. Further, with the US government in an expansionary mode, investors have opted out of US debt securities in search of better returns and as global markets have turned volatile.
The Securities & Exchange Board of India earlier relaxed certain norms for overseas investors. Meanwhile, the Reserve Bank of India allowed electronic trading platforms to operate, which also aided foreign investors.
Moreover, even as corporate earnings have taken a hit due to volatility in global markets and as US President Donald Trump imposed 50 per cent cumulative tariffs on Indian imports, India’s central government is expected to refrain from any additional borrowing in government securities (G-Secs), which gives investors hope of generating stable returns.
“As an investor, it's definitely better to stay in debt and opt for safer assets right now because the global outlook seems kind of uncertain,” said a fund manager at a mutual fund house. “There is so much overvaluation in markets, but right now gilts and corporate bonds, to an extent, especially in the belly (with 5-10 years of maturity), seem like good bets.”
Foreign investments into India will help deepen the debt market, said analysts. For individual domestic investors as well as individuals investing in debt funds, this opens up scope for higher returns and stability.
