FPI funds in Govt bonds fall as gap between India, US bond yields narrows

Bonds

Foreign portfolio investors’ (FPI) investment in government securities in the global bond index fell in the last two weeks due to the narrow interest rate differential between India and US bonds and the pressure on the Indian rupee.

According to the Clearing Corporation of India (CCIL) data, investment by FPIs in government securities in the global bond index reduced by Rs 8,946 crore. FPI investment in Fully Accessible Route (FAR) securities stood at Rs 2.66 lakh crore as on February 24, as compared to Rs 2.75 lakh crore as on February 7.

“From February 10 to February 20, FPIs sold approximately $1.2 billion worth of government bonds under the FAR category. This was primarily due to the narrow IGB/UST yield spread, which was just above 200 bps, and the depreciating rupee,” said Mataprasad Pandey, Vice-President of Arete Capital Service said.

Usually, whenever there is an uptick in the US Treasury yield and volatility in the rupee, FPIs pull out money from the Indian markets and invest in their home countries or in the US.

In the last few months, even after the rate cut by the US Federal Reserve, US Treasury yields remained on the higher side amid inflationary pressures and expectation of lower rate cuts going forward.

On the other, Indian bond yields, especially the 10-year benchmark bond has not moved much and remained mostly range bound due to better macroeconomic conditions, better inflows from FPIs, and higher demand from long term investors such EPFO, pension funds, and insurance companies.

This has led to a narrowing of the gap between India and US bond yields.

This outflow of funds has come just after Indian bonds saw heavy inflows from FPIs after inclusion in the Bloomberg Emerging Market (EM) Local Currency Index.

FPIs have invested around Rs 11,000 crore after inclusion in Bloomberg bond index.  Before that, they invested Rs 62,431 crore in government bonds as of November after  inclusion in the JP Morgan index, the Economic Survey 2025, which was released on January 31, said.

FAR enables non-residents to invest in specified Government of India dated securities without any investment ceilings.