Foreigners pull out money from govt. bonds after 2 months of buys

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, ET BureauLast Updated: Sep 09, 2026, 05:30:00 AM IST

Synopsis

Foreign investors have sold Indian government bonds since August. Global yields have risen significantly, impacting investment decisions. Bloomberg's decision to defer local debt inclusion also affected flows. Higher yields in developed markets narrowed the differential with Indian rates. Market participants anticipate largely neutral flows in the near future.

Mumbai: Foreign fund flows into Indian bonds have reversed after an unprecedented spike three months ago, reflecting the combined impact of persistently high global yields, Bloomberg's move to defer inclusion of local debt on a key gauge, and increasingly shortened odds on a rate hike.

Since August, foreign portfolio investors (FPI) sold government bonds worth ₹987 crore. That compares with robust net purchases of ₹49,355 crore in June and July through the Fully Accessible Route (FAR) that applies to FPIs.

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"Global risk-free rates are rising and then there are AI-related flows which are being attracted by other countries. It is very difficult to see inflows amid high crude prices," said Abhishek Upadhyay, economist, fixed income strategy, ICICI Securities PD. "Additionally, some investors are also waiting on the sidelines to enter the market after there is a rate hike."

The US 10-year treasury yield climbed to 4.81%, its highest level since November 2023 last week, while Japan's 10-year government bond yield moved above 3% for the first time since 1996. German 10-year bond yields, a key metric for euro zone borrowing, rose to the highest level since 2011.

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Higher yields in the developed markets have narrowed the differential with Indian rates.

Additionally, Indian bonds faced a major setback late July when Bloomberg Index Services deferred the inclusion of local debt in its flagship Global Aggregate Index, which is tracked by funds that collectively invest into about $70 trillion worth of debt worldwide.

"It is difficult to imagine that debt inflows could surge unless there is some let-up in high global rates. High rates globally have been a hurdle for portfolio flows, despite well behaved inflation and a stable currency," said Dhiraj Nim, economist and FX strategist, ANZ Bank.

The rupee has stabilised in FY27 after having hit historic lows - in the vicinity of 97 to a dollar - late May.

Market participants do not expect either a sharp surge in inflows or significant outflows, but rather a period of largely neutral flows. Any buying that does emerge is likely to come from global investors with dedicated India or broader Asia mandates, economists said.

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