Foreign Investors Exit Indian Bonds in Record Numbers as Rupee Weakens 

Foreign portfolio investors (FPIs) sharply reduced exposure to Indian debt in 2025, with bond outflows touching record levels as a persistently weak rupee diluted returns. Data from depositories and market disclosures show sustained selling across government securities and corporate bonds, reversing the steady inflows seen in previous years. 

According to clearing and settlement data, FPIs sold Indian bonds worth over ₹1.2 lakh crore during the year, the highest annual outflow on record. The exodus gathered pace in the second half of the year as the rupee slipped to successive lows against the US dollar, offsetting the benefits of higher domestic yields. 

Rupee Depreciation Weighs on Dollar Returns  

While Indian bond yields stayed appealing in local currency, the drop in the rupee greatly cut down dollar-adjusted returns for foreign investors. Even a small decline in the rupee had a large effect on returns, especially for those holding longer-term government securities. 

The currency pressure was driven by a combination of factors, including a strong US dollar, elevated crude oil prices, and intermittent global risk aversion. As the rupee weakened, foreign investors increasingly preferred to cut exposure rather than hedge currency risk, which added to costs. 

Global Rate Environment Drives Reallocation  

Tighter global financial conditions also contributed to faster bond outflows. Higher yields in developed markets, especially US Treasuries, reduced the interest rate gap that had previously encouraged investments in emerging market debt, including India. As a result, global investors moved capital toward assets with better risk-adjusted returns and less currency volatility. This change was seen in decreased participation by foreign portfolio investors in Indian government bond auctions and secondary market trades for much of the year. 

Corporate Bonds See Limited Interest  

The selling pressure was not limited to sovereign debt. Corporate bonds also saw consistent FPI outflows, particularly in lower-rated segments. Foreign investors remained cautious amid global uncertainty and currency risks, preferring highly liquid instruments or exiting credit exposure altogether. Domestic institutional investors, such as banks, insurance companies, and mutual funds, took on some of the selling. However, local demand did not fully cover the foreign exits. This situation resulted in higher yields for certain maturities. 

Impact on Bond Markets and Outlook 

Despite significant foreign portfolio investment selling, the broader Indian bond market stayed stable. Strong domestic participation and regulatory steps helped maintain liquidity. Government borrowing continued as scheduled, with little disturbance to primary issuances. However, the extent of the outflows highlighted how sensitive foreign debt flows are to currency changes. Until the rupee stabilises and global financial conditions ease, foreign investor participation in Indian bonds is expected to remain cautious.