FPIs double down on debt - Rs 40,000 crore and counting

While debt inflows do not solely drive the rupee, experts note that they support stability. Since January 2025, the rupee fluctuated, depreciating to 87.79 per US Dollar in February before recovering to 85.69 by March 25.

While most discussions on foreign flows focus on equity investment and its falling popularity, foreign institutional investor (FII) flows into Indian debt markets have quietly gained momentum. As of March 25, according to NSDL data, net inflows stood at Rs 39,839 crore, compared to Rs 20,250 crore in net equity outflows. Drivers for the segment, according to experts, come on the back of India’s inclusion into the JP Morgan Bond Index, anticipation of rate cuts in the upcoming MPC as well as India’s strong macroeconomic outlook.

Shantanu Godambe, Fund Manager (Fixed Income) at DSP MF, explained that currently most of these flows are passive and have come as a result of India’s inclusion in the JP Morgan Index. "When FPIs were included in the JP Morgan bond index, they initially started buying. However, during the course of the year, buying activity slowed down,” he explained. This was due to a sharp jump in the yields on US treasury notes, which caused redemptions in Emerging Market debt impacting passive flows. When the yield on US treasury notes goes up and Indian bond yields remain stable, it increases the spread between both and leads to FPI pulling money from India and investing in their home country for better returns. Experts like Godmanbe see this picking up in the coming days in anticipation of inclusion in the FTSE Russel by September 2025.

Over the past five fiscal years, total FPI inflows amounted to $54 billion, with $33 billion directed toward debt and $21 billion into equities. "The trend of higher FPI debt flows, supported by India's inclusion in global debt indices, has improved the portfolio mix. For a growing country like ours, this is not a bad outcome," said SEBI Whole-Time Member Ananth Narayan at a recent ARIA (Association of Registered Investment Advisers) event, adding that the overall FPI flows into the country remain positive, driven by increased debt inflows.

According to data, Year-to-date FPI flows into debt was around Rs 50,927 crore against equity outflows of Rs 1.3 lakh crore (as of March 25, 2025).

Global interest rate trends are also influencing investor behaviour. "There’s little reason to remain underweight in India. Some investors may go overweight, while others stay slightly underweight," Godambe added.

Upcoming RBI policy rate adjustments will further impact bond yields and FPI flows, experts suggest. Anticipation of these cuts could also be a reason for the increase in flows. "A 25-basis-point rate cut and a shift in stance could result in increased FPI flows into debt (as lower rates make the bond market more attractive)," Godmabe says.

Macroeconomic factors are also adding to India’s appeal. "Over the past decade, India has maintained political stability, controlled inflation better than major economies, stabilised the rupee, and pursued fiscal consolidation, with the deficit projected to decline to 4.4 percent of GDP in FY2026 from 6.7 percent in FY2022," Piyush Baranwal, Senior Fund Manager, WhiteOak AMC said, adding that India also remains among the fastest-growing large economies. He added that India’s current sovereign rating does not fully reflect its economic strength. A credit upgrade could further drive flows to Indian bonds, Baranwal added.

While corporate bond flows have been subdued in FY25, with around Rs 7,400 crore invested, G-Secs have attracted Rs 1,17,000 crore.

"Most investments have been in government securities due to India’s inclusion in global government bond indices, which exclude corporate bonds," Godambe explained.

While debt inflows do not solely drive the rupee, experts note that they support stability. Since January 2025, the rupee has fluctuated, depreciating to 87.79 per US Dollar in February before recovering to 85.68 by March 26.

Overall, despite a significant liquidity deficit, investors (both domestic and foreign) are positioning themselves for potential rate cuts, driving demand for bonds, according to Venkatakrishnan Srinivasan, Founder and Managing Partner of Rockfort Fincap. “The absence of new G-Sec issuances has supported demand for SDLs, while top-rated corporate bonds are seeing strong demand with lower spreads. However, lower-rated issuers are not yet benefiting. The market remains highly focused on the RBI’s upcoming policy decision for further direction,” he adds.

What’s next?

Typically, low spreads between Indian and US 10-year bond yields should theoretically lead to lower inflows, but Baranwal adds that looking at the current spread and comparing it to the past spreads which used to be higher does not take into consideration the change in nuances.

"India’s 10-year yield at 6.65 percent and US Treasuries at 4.35 percent create a 230-basis-point spread, lower historically. However, India’s fiscal deficit is shrinking and targeted at 4.4 percent, while the US.deficit remains high at 6.5 percent. With stable inflation around 4 percent and the US facing stagflation risks, Indian bonds remain attractive, sustaining FPI debt inflows, " Baranwal said.

While debt inflows remain positive, experts argue this doesn’t indicate a broad shift by FPIs toward debt away from equities. Some investors favour debt due to expected rate cuts that would benefit debt markets. However, others see this as portfolio diversification rather than a move away from equities.

Recent US policy changes, following months of tariff-driven optimism, have created uncertainty, prompting investors to diversify. Weak European growth and a slowing China initially made the US the safest bet. However, policies now signal a weaker dollar and lower interest rates, prompting funds to shift, boosting FPI inflows into India and markets like Hong Kong and Germany.

While equities remain attractive long-term, debt investments are gaining short to medium-term traction. Experts emphasise that equity and debt flows serve different objectives, and while debt inflows may continue alongside negative equity flows, the trend won’t exist indefinitely.