Why in news?
Despite the inclusion of Indian government bonds in major global indices and relaxed rules under the Fully Accessible Route (FAR), foreign portfolio investment (FPI) into Indian debt has fallen short of expectations in 2025. Understanding the reasons behind this trend is important for assessing India’s debt market outlook.
Background
The Reserve Bank of India and the Securities and Exchange Board of India introduced the FAR in 2020 to allow non‑resident investors to purchase specified government securities without any investment caps. Analysts expected that India’s entry into JP Morgan’s Government Bond Index–Emerging Markets (GBI‑EM) and the FTSE Russell index would attract passive inflows of $20–25 billion. However, by October 2025 foreign investors had invested only around ₹69,073 crore ($7.8 billion) through FAR.
Reasons for muted inflows
- Policy caution: In August 2024 the government and the RBI removed long‑term (14‑year and 30‑year) securities from FAR, citing concerns that unrestricted inflows could destabilise the market.
- Global factors: Rising U.S. bond yields, geopolitical tensions and uncertainty over interest‑rate paths have made investors cautious. Many FPIs adopted a “barbell” strategy by investing in very short‑ or medium‑term Indian papers while staying away from longer‑dated bonds.
- Front‑loaded flows: Investors rushed to buy bonds immediately after index inclusion was announced in 2023, leaving little new demand when the phased inclusion began in June 2024. Between June 2024 and March 2025, inflows reached only about $14 billion, roughly 40–45 percent below projections.
- Currency concerns: Rupee volatility and profit‑taking have triggered outflows at various points in 2025, offsetting some debt inflows.
Implications and outlook
- Borrowing costs: A deeper foreign investor base can lower government borrowing costs and elongate the yield curve. Muted inflows mean the government must rely more on domestic investors.
- Macro fundamentals: India’s moderate inflation, strong consumption and GDP growth still make its bonds attractive compared to other emerging markets.
- Future flows: Potential rate cuts in the United States, progress on India‑US trade talks and inclusion in the FTSE Russell index could revive foreign interest.
Sources: Indian Express Business, Business Standard