Foreign Investors Pull Over $1 Billion from Indian Debt Markets in June

Foreign Portfolio Investors (FPIs) have pulled out more than $1.06 billion from Indian debt markets this June, continuing a trend that began in April. That makes it the third straight month of net outflows, with a massive $3.03 billion having already exited in April. Most of June’s pullback happened in government bonds under the Fully Accessible Route (FAR)—a special channel that allows foreign investors direct access to Indian debt.

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What’s Behind the Exit?

So, why are investors backing out? A mix of global and local factors are at play:

1. Shrinking Yield Gaps

The difference between what Indian and U.S. government bonds pay is getting smaller. India’s 10-year bond yield has dropped from 6.6% in April to 6.33% in June. Meanwhile, U.S. yields have climbed from 3.99% to 4.35%. That tighter spread makes Indian bonds less tempting in comparison.

2. Global Jitters

Investors are feeling the heat from global trade tensions and fears of an economic slowdown. As a result, they’re shifting to safer bets, pulling money out of emerging markets like India.

3. Rupee Rollercoaster

Currency swings are adding to the nervousness. The Indian rupee has seen more volatility lately—implied volatility is averaging 4.26% over the last six months, up from 2.24% under the previous RBI governor.

A Strategic Shift: What’s Changing?

It’s not all doom and gloom. Even as overall investments fall, there’s a clear shift in strategy:

Short-Term Bonds are In

Foreign investors are quietly increasing their holdings in short-term government bonds—like the 5.63% GS 2026 and 7.02% GS 2031—by up to 300 basis points. Why?  They’re betting that the RBI’s expected cut to the cash reserve ratio (CRR) will inject ₹2.5 lakh crore into the system, boosting liquidity.

Selective Optimism

While long-term debt remains under pressure, the short-term market is showing glimmers of hope. Some investors are positioning themselves to take advantage of a potential bounce if liquidity improves and yields adjust.

Looking Ahead: What’s Next for Indian Debt?

The mood in the Indian debt market is cautious. The shrinking yield gap with the U.S., coupled with global uncertainty and currency volatility, is keeping investors wary. That said, the RBI’s expected CRR cut could offer a much-needed liquidity boost.

Bottom line? Foreign investors aren’t entirely out—they’re just being more selective and short-term focused. All eyes will be on the RBI’s next moves, which could determine whether the tide turns back toward Indian debt in the coming months.