FPI Outflows from Indian Debt Market Hit $2.27 Billion in April, Biggest Since 2020

Foreign Portfolio Investors (FPIs) have made a sharp exit from the Indian debt market this April, pulling out $2.27 billion so far. This marks the largest monthly outflow since May 2020 and the first significant withdrawal since November 2024. This marks a notable reversal after four consecutive months of inflows into Indian debt.

What’s Driving the Exit?

The biggest reason behind this selloff is the narrowing yield spread between Indian and U.S. government bonds. Since the start of April, India’s 10-year government bond yield has fallen from 6.6% to 6.33%, while U.S. 10-year yields have risen from 3.99% to 4.35%. This has caused the yield differential — the extra return investors earn on Indian bonds compared to U.S. bonds — to shrink to just 200 basis points, its lowest level since September 2004, according to Bloomberg data.

When the yield spread narrows, Indian bonds become less attractive than U.S. debt, especially considering the relatively lower risk associated with the U.S. Treasury market.

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Profit Booking and Global Cues

Experts say part of the outflow is due to profit booking as investors lock in gains from previous inflows, especially after the Indian rupee appreciated nearly 3% from recent lows. Additionally, global market conditions have become less favourable for emerging market debt. Rising US bond yields — driven by elevated market volatility, persistent inflation concerns, and fears of new trade tariffs — reduce the appeal of riskier assets like Indian bonds.

Soumyajit Niyogi, Director at India Ratings & Research, highlighted that the shrinking yield advantage encourages investors to shift funds to U.S. debt, offering better returns.

Domestic Conditions Remain Strong

Despite the global outflows, India’s domestic debt environment remains fundamentally strong. Key support factors include:

• Easing inflation.
• Expectations of rate cuts by the RBI.
• Strong market liquidity.
• Favourable borrowing conditions.
• Active Open Market Operations (OMOs) by the RBI.

Gopal Tripathi, Head of Treasury and Capital Markets at Jana Small Finance Bank noted that with the terminal repo rate expected to settle between 5.25% and 5.50%, the ten-year bond is still trading at a spread of around 100 basis points, which remains attractive in a local context.

Conclusion

While the current wave of FPI outflows may be unsettling, especially in light of global uncertainties, India’s domestic debt market remains supported by strong fundamentals. The situation highlights the increasing influence of global monetary shifts on emerging markets and the importance of monitoring international bond movements.