Foreign Inflows into Indian Government Bonds Slow as Currency and Yield Headwinds Mount
Foreign investment in Indian government securities has decelerated sharply after a June surge, as narrowing yield spreads and rupee depreciation threaten to erode returns for international holders.
Foreign capital inflows into Indian government securities have decelerated significantly following a brief surge in early summer. CCIL data shows average daily inflows have moderated to approximately ₹500 crore over the past week.
This marks a sharp contrast to the momentum seen immediately after the Reserve Bank of India and the government introduced measures on June 5 to attract foreign capital through the Fully Accessible Route (FAR). Since that announcement, a total of ₹53,289 crore has entered the market.
The peak of this activity occurred on June 14, which recorded a single-day inflow of ₹14,034 crore. The subsequent cooling indicates that the initial wave of positioning has largely played out.
Market participants are now reassessing the appeal of rupee-denominated assets due to a confluence of macroeconomic headwinds. A primary factor is the narrowing yield spread between Indian and U.S. government debt, which reduces the relative income advantage for foreign buyers.
Compounding this dynamic is growing disappointment over delayed decisions regarding the Bloomberg index rejig. The anticipated inclusion had previously driven a wave of strategic capital into the market, and the delay has removed a key near-term catalyst.
Currency risk has also emerged as a critical deterrent for international portfolios. The Indian rupee traded in the 94.50 to 94.60 range per U.S. dollar in mid-June but has steadily weakened since.
On Wednesday, the currency closed at 96.56 per dollar. This depreciation is being driven by rising crude oil prices and escalating geopolitical tensions.
For global investors, this currency trajectory presents a direct threat to total returns. Even if nominal bond yields remain attractive, unchecked rupee weakness risks eroding the actual gains realized when converting proceeds back into dollars.
The moderation in FAR inflows suggests that foreign allocators are adopting a more cautious stance. Future capital deployment will likely depend on clearer signals regarding index inclusion timelines and stabilization in the foreign exchange markets.
