FPIs withdraw $2.27 billion from Indian debt in April so far, largest outflow since May 2020

A key driver appears to be the narrowing yield spread between Indian and US bonds.

After four consecutive months of inflows, Foreign Portfolio Investors (FPIs) have turned net sellers in the Indian debt market, pulling out over $2.27 billion so far in April, the largest monthly outflow since May 2020 and the first since November 2024.

Analysts attribute the selloff to a combination of global and regional factors, including profit-booking across several Asian markets amid deteriorating external conditions. A key driver appears to be the narrowing yield spread between Indian and US bonds.

Since early April, India’s ten-year government bond yield has declined from 6.6 percent to 6.33 percent, while the US ten-year yield has risen from 3.99 percent to 4.35 percent. This has compressed the yield differential to approximately 200 basis points — its tightest level since September 2004, according to Bloomberg data.

Soumyajit Niyogi, Director at India Ratings & Research, noted that the shrinking yield advantage has prompted foreign investors to reallocate funds toward US debt, which currently offers more attractive returns.

Rising US bond yields are being fueled by elevated market volatility, persistent inflation concerns, and fears of potential trade tariffs — developments that have dampened expectations of near-term rate cuts by the Federal Reserve.

Despite global headwinds, domestic conditions remain supportive of Indian rupee bonds. Easing inflation, expectations of further rate cuts, robust liquidity, ongoing open market operations, and a favourable borrowing environment are all tailwinds for the local debt market.

“With the terminal repo rate expected between 5.25 percent and 5.50 percent, the ten-year bond is trading at a spread of around 100 basis points — a relatively rich level. FPIs have likely locked in gains at an opportune time, especially with the rupee appreciating nearly 3 percent from recent lows,” said Gopal Tripathi, Head of Treasury and Capital Markets at Jana Small Finance Bank.