Foreign flows into India bonds to come off record highs in 2025

The rupee dropped 2.8% in 2024, and hit a record low of 85.8075 on Dec. 27, while India’s benchmark bond yield fell 42 basis points.

Foreign flows into Indian government bonds are set to decline in 2025, after spiking to a record high in 2024 as the debt got added to JPMorgan’s emerging market debt index, investors said.

Interest rate trajectories in India and the United States and moves in the rupee will influence the pace of flows, they said.

”For 2025, foreign inflows into the Indian government bond market are expected to remain strong but may not match the record levels of 2024,” said Wei Li, head of multi-asset investments at BNP Paribas SA.

Overseas investors net bought 1.24 trillion rupees ($14.5 billion) of Indian bonds under the so-called fully accessible route in 2024, clearing house data showed.

Most bonds under the route, which allows unfettered foreign investment, are part of JPMorgan’s index.

Despite the optimistic outlook, inflation expectations and policy adjustments as well as global market fluctuations could affect capital flows, BNP Paribas’ Li said.

”Therefore, investors should remain cautious and closely monitor market dynamics.”

Investors expect rate cuts in India to kick off from February but worry that the easing cycle could be a shallow one. The Federal Reserve has already projected fewer cuts for 2025.

How the rupee moves will also sway foreign investors, with the dollar set to rise more as Donald Trump takes charge as the U.S. president.

The rupee dropped 2.8% in 2024, and hit a record low of 85.8075 on Dec. 27, while India’s benchmark bond yield fell 42 basis points.

Currency weakness can temper the momentum of bond inflows, especially in case of persistent depreciation pressure, Dhiraj Nim, an economist and FX rates strategist at ANZ, said.

Inflows will continue but at ”an erratic and less enthusiastic pace” as the bonds are still relatively attractive, Nim said.

Radhika Rao, executive director and senior economist at DBS Bank, sees a gradual pickup in passive monthly inflows as Indian bonds get added by two more index providers this year.

She expects the local central bank to cut rates by 25 basis points in February, and by a total of 75 basis points in the cycle