The recent shift in preference of Foreign Portfolio Investors (FPIs) towards safer US assets over Indian debt due to a stronger US dollar and rising US bond yields has impacted Indian debt markets in the first month of 2025. While FPIs infused a record ₹1.65 lakh crore into Indian debt markets last year following India’s inclusion in JP Morgan’s Global Emerging Market Government Bond Index, they have offloaded government bonds worth ₹11,000 crore by January 17 this year.
Experts attribute this cautious approach by FPIs to the uncertainty stemming from the rise in US yields and the depreciation of the Indian Rupee. Anitha Rangan, Economist at Equirus, highlighted that the slowdown in flows can be attributed to a rise in US yields and a strengthening US dollar, leading to a pause in investments. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, mentioned that FPI flows are likely to reverse only after signals of a peak in the dollar and US bond yields followed by their decline, which depends on President Trump’s tariff policies.
Despite the current subdued phase, Mahendra Jajoo, Chief Investment Officer-Fixed Income at Mirae Asset Investment Managers, emphasized that India’s global bond index inclusion narrative remains intact and is expected to bounce back in the future. He suggested that policies may need to be reviewed and adjusted as experiences are gained to enhance the attractiveness of Indian debt for FPIs.
According to S P Sharma, Chief Economist at PHDCCI, the significant growth in US bond yields compared to India reflects a growing preference for US bonds driven by higher yields and perceived stability. Shriram Ramanathan, CIO-Fixed Income at HSBC Mutual Fund, remains optimistic about the long-term prospects of FPI flows into Indian Government Bonds post-index inclusions in the JP Morgan and FTSE Russell indices, expecting total index flows of $35-40 billion by March 2026 with FPI ownership reaching 4 per cent.
In conclusion, while the current market conditions have led to a pause in FPI investments in Indian debt, the long-term outlook remains positive, contingent upon factors such as US Federal Reserve policy changes, global market volatility, and policy adjustments to enhance the attractiveness of Indian debt for foreign investors.
