FAR from Ideal: FPI buying of G-Secs falls sharply in FY26

Synopsis

Foreign investors bought fewer Indian securities in FY26. Outflows increased as West Asia conflict escalated. Economists predict muted flows in FY27 due to the Gulf conflict and a weaker rupee. Concerns over government finances also impacted sentiment. A major trigger like bond index inclusion is needed for significant inflows.

Mumbai: Foreign portfolio investors (FPI) net bought ₹3,546 crore in FY26 of fully accessible route (FAR) securities, significantly lower than the previous year, as outflows accelerated toward the year end after war clouds began gathering over West Asia. To be sure, the inclusion of Indian debt in a key global bond gauge in FY25 had led to frontloaded purchases.

Economists expect flows to remain muted in FY27 amid the Gulf conflict, a weakening rupee, and the relatively more attractive pricing of US bonds.

Concerns over fiscal slippage after the latest cuts in excise duty on petrol and diesel have also weakened sentiment for Indian bonds amid inflationary expectations and the likelihood of a supply glut.

Agencies

West Asia conflict, comparitively better US yields and weak rupee may keep flows subdued in FY27

In FY25, FPI net inflows had climbed to ₹2.31 lakh crore due to inclusion of Indian sovereign bonds into JP Morgan EM Index in the same year. A meaningful pickup in inflows would likely require a significant trigger, such as inclusion in a global bond index like Bloomberg, experts said.

In March alone, FPIs sold ₹17,686 crore worth of debt-the largest monthly outflow of the year-amid deteriorating sentiment as the rupee weakened to record lows against the backdrop of the West Asia conflict. The rupee has declined over 11% in this fiscal year, while bond yields have risen 55 basis points, making Indian assets less attractive for global bond investors.

"As long as the West Asia crisis continues, bond yields will face upward pressure. And even if the war stops, it will just halt the negative pressure and would not result in meaningful gains due to worries over fiscal slippage," said Gaura Sengupta, chief economist at IDFC First Bank.

"FPIs did not offload Indian bonds as much as they did with equities, so that is a good sign. But for true inflows to come in again, a large event like a bond index inclusion will need to take place," Sengupta said.

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