FPIs Pull ₹25,544 Cr from G-Secs Despite Index Inclusion
Foreign Portfolio Investors (FPIs) have withdrawn ₹25,544 crore from Indian government securities under the Fully Accessible Route (FAR) in the first quarter of FY26. This sharp sell-off comes at a time when Indian bonds are gaining recognition globally through their inclusion in key emerging market bond indices.
The withdrawal marks the first major outflow since Indian G-Secs were announced to be included in international indices. Instead of a capital influx, investors are exiting due to diminishing incentives to hold Indian debt. A key factor is the shrinking yield spread between India’s 10-year bond and that of the U.S. Earlier, the spread stood comfortably above 400 basis points. Now, it hovers around 180 basis points.
While Indian benchmark 10-year bond yields have remained stable at around 6.20%, U.S. 10-year Treasury yields have climbed to approximately 4.58%. This has made U.S. debt instruments relatively more attractive, especially after adjusting for currency fluctuations and India-specific regulatory burdens.
Global Risks and Tariff Tensions Weigh Heavy
The narrowing yield premium isn’t the only factor driving this retreat. Rising geopolitical concerns—particularly between India and its western neighbor—as well as increasing global protectionism have triggered a flight to safety. As the U.S. moves toward more aggressive tariff barriers and interest rate normalization, foreign investors are shifting capital toward American assets.
Indian G-Secs, despite being officially listed on global platforms such as the JP Morgan Emerging Market Bond Index and Bloomberg’s EM Local Currency Government Index, have yet to fully benefit from these endorsements due to volatile global investor sentiment.
Ripple Effects on Bond Market and Currency
This significant capital outflow could tighten liquidity in India’s debt market and put upward pressure on borrowing costs. At the same time, the rupee could face depreciation as dollar demand rises amidst capital exit.
With the Reserve Bank of India expected to announce a policy decision soon, markets are watching closely for a potential rate cut. Such a move, while supportive of growth, may further lower the domestic yield advantage, possibly prompting further FPI exits unless accompanied by robust macroeconomic signals.
In the longer term, however, the bond index inclusion remains a strategically important step for India’s integration into global capital markets. Continued fiscal discipline, reform momentum, and improved ease of doing business will be key to reversing this trend and restoring investor confidence.
