Summary of this article
FPIs have bought bonds of around Rs. 1,600 crore over past two days
FPIs buying bonds have limited rise in yields
Foreign portfolio investors have a limited rise in Indian bond yields even as domestic investors remain wary of bond investments. While market participants see a limited scope for bond yields to fall, one of the primary reasons cited for bond prices to rise is the Reserve Bank of India's open market operations (OMO), through which the central bank has offered to buy bonds from the market.
However, the recent announcement by the RBI has ignored the most liquid government bond, the erstwhile 10-year benchmark 2035 bond with 6.33 per cent as coupon. This limited domestic investors' interest in buying bonds. But FPIs, on the other hand, have picked up bonds as the reallocation of funds began in the new year 2026, and as a depreciating rupee provided a good entry point for these investors in emerging market bonds.
Currently, the 10-year benchmark bond yield is around 6.62 per cent. FPIs have added around Rs. 1,601.67 crore of bonds in their portfolios just through the fully accessible route in the last two days. FPIs buying in the debt market is also due to hopes of Indian bonds being included in the Bloomberg Global Index, which is estimated to bring $25-30 billion of fresh investments into the market. Market participants said that some FPIs wished to frontload their investments on the hopes that such an announcement could come in the upcoming week.
“Inflow in FAR bonds over the past two days could signal a modest but meaningful shift in foreign sentiment toward Indian debt, especially after December's outflow. While it's positive, this flow should be contextualised as cautious buying rather than a sustained turnaround,” Abhishek Kumar, Securities and Exchange Board of India- registered investment adviser (Sebi-RIA), said.
“A potential positive trigger could be the widely expected Bloomberg Global Aggregate Index inclusion decision, which is expected by April 2026. That trigger could increase passive inflows, but until then, we expect volatility driven by global rate expectations and dollar movements rather than a broad recovery in foreign appetite for Indian government securities,” he added.
On the other hand, with liquidity still considered tight for banks, domestic institutional investors have been tepid in investing in bonds. Though the RBI has continuously infused liquidity in the banking system, banks suffer from a deposit lagging behind credit growth. Banks are also in an overall state of conservative investment as RBI’s rate easing cycle is seen near its end, with already 125 basis points of rate cut delivered in 2025.
In addition to this, the RBI refrained from offering to buy liquid papers in the upcoming OMO auction on January 12, where it had offered to buy Rs. 50,000 crore of government bonds from the market. Instead, it has offered most bonds maturing within 2029 to 2053, some of which are illiquid and not traded frequently.
