After remaining largely on the sidelines for several months, foreign investors have returned to Indian debt markets, buying government securities for eleven consecutive sessions following India’s decision to exempt interest income and capital gains earned by foreign portfolio investors (FPIs) on government securities. The renewed interest has also been aided by the Reserve Bank of India’s (RBI) move to widen the pool of bonds available under the Fully Accessible Route (FAR).
Since June 4, foreign institutional investors (FIIs) have purchased around $2.6 billion worth of Indian debt, marking a sharp turnaround from the muted activity seen earlier this year. Between January and May 2026, foreign investors had bought just $1.23 billion worth of Indian bonds.
The surge in inflows has been driven by a combination of policy and structural factors. The tax exemption has improved post-tax returns for foreign investors, while the RBI’s June policy measures expanded access to longer-dated government securities under FAR, improving liquidity and broadening the investable universe. India has also continued to benefit from global bond index inclusion, which has emerged as a significant source of passive and quasi-passive inflows since last year.
Investor sentiment has received additional support from easing geopolitical concerns following recent developments in the US-Iran situation and a moderation in crude oil prices. However, markets continue to watch whether the relative calm will be sustained and whether key energy supply routes, particularly through the Strait of Hormuz, remain free from disruptions. Investors are also closely monitoring US Treasury yields, global risk appetite and currency movements.
Despite the recent buying by foreign investors, government bond yields have remained largely range-bound. Market participants remain cautious about the durability of surplus liquidity conditions, while the rupee’s stability continues to be closely linked to sustained foreign capital inflows. Any prolonged rise in crude oil prices could increase imported inflation and add pressure on India’s external balances, given the country’s dependence on oil imports.
Markets are also tracking the progress of the monsoon and its potential impact on food prices. Higher energy costs combined with weather-related inflation risks could push inflation expectations higher in the coming quarters. While a policy rate hike is not currently the base-case scenario, some market participants have begun factoring in the possibility of a less accommodative monetary stance in the second half of the fiscal year if inflationary pressures re-emerge.
Experts believe foreign inflows are likely to continue, although the pace may not be uniform. The next phase of inflows will depend on the rupee remaining relatively stable, global risk appetite holding up and Indian bond yields continuing to offer attractive returns compared with developed-market alternatives. Reuters has also noted that while the recent tax changes and RBI measures are supportive, foreign investor participation remains closely linked to currency performance.
An tax expert said, the outlook for FPI debt inflows remains constructive over the medium term, although the trajectory is likely to be gradual rather than one-directional. Sustained inflows, he said, will depend on crude oil prices, inflation trends, the resilience of the rupee, US bond yields and the broader global geopolitical environment.
Experts also flagged key risks to the outlook. A weaker rupee could erode foreign investors’ effective returns, while higher global yields or a risk-off environment could draw capital back towards safer markets. Additionally, if investors quickly price in the benefits of the recent policy measures, the initial surge in inflows could moderate over time.
Another tax expert said the recent trend should be viewed as the beginning of a more durable foreign interest in Indian debt, albeit at a slower and more episodic pace than the initial burst. He expects inflows to continue over the coming months, punctuated by periodic pauses whenever bond yields rise or the rupee comes under pressure.
