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FPIs, who had been injecting funds into Indian debt for four consecutive months, have shifted gears in April, yanking out over $2.27 billion so far.
FPIs pull $2.27 billion from Indian debt in April.
As inflation continues to smolder in the United States and market volatility grips Wall Street, the ripple effects are beginning to hit home thousands of kilometres away, specifically in India’s debt market. Despite India’s relatively stable economic environment and easing inflation, foreign investors are pulling billions out of the country’s bond market, lured instead by rising returns in the US.
According to a Moneycontrol report, foreign portfolio investors (FPIs), who had been injecting funds into Indian debt for four consecutive months, have shifted gears in April, yanking out over $2.27 billion so far. This marks the most substantial monthly withdrawal since the onset of the pandemic in May 2020 and breaks a five-month streak of net inflows.
Market watchers attribute the abrupt reversal to a narrowing yield gap between Indian and US government bonds, a critical factor for foreign capital seeking fixed-income returns. At the start of April, India’s benchmark 10-year government bond was yielding 6.6%, but that has since slipped to 6.33%.
Meanwhile, yields on the US 10-year Treasury have climbed from 3.99% to 4.35%. The resulting spread, now down to just 200 basis points, is the slimmest it’s been in over two decades, dating back to September 2004.
India Ratings and Research Director, Soumyajit Niyogi, noted that the comparative allure of US bonds has grown sharply. Given the heightened market uncertainty and stubborn inflation in the US, interest rate cuts from the Federal Reserve seem increasingly unlikely in the short term. Higher yields on US bonds are drawing foreign capital away from emerging markets like India, he said.
Ironically, the very instability plaguing the US economy – persistent inflation, fears of escalating trade tariffs, and the Fed’s cautious stance – is contributing to this shift. While US President Donald Trump has been vocally pressuring the Federal Reserve to cut rates, the central bank remains unmoved, opting instead to maintain elevated rates in a bid to curb inflation.
Back home, India’s economic fundamentals remain strong. Inflation is easing, the rupee has appreciated roughly 3% from recent lows, and liquidity in the financial system is ample. The Reserve Bank of India (RBI) is even purchasing bonds in the open market, a move that typically supports prices and lowers yields. Yet, none of these positives have been enough to stem the tide of foreign capital outflows.
Gopal Tripathi, Treasury Head at Jan Small Finance Bank, believes the Indian bond market still holds promise. Currently, the 10-year bond yield is trading about 100 basis points above the repo rate of 5.25% to 5.50%, which is quite favourable by historical standards. But with global conditions tilting in favour of the US, we’re witnessing some inevitable churn, he said.
Analysts warn that this shift could trigger a broader rebalancing of global debt portfolios, especially if the US continues to offer comparatively attractive returns.