Foreign portfolio investors (FPIs) remained net sellers of Indian government securities for the third consecutive month in October, as elevated US treasury yields, geopolitical uncertainty and concerns over the rupee continued to dampen investor appetite.
FPIs sold a net Rs 5,615 crore of government securities under the fully accessible route (FAR) during October, compared with net sales of Rs 10,602 crore in September, according to data from the Clearing Corporation of India.
FPI holdings in government securities fell to Rs 3.56 lakh crore as of October 31, their lowest level in five months.
Higher US Treasury yields have made dollar-denominated assets more attractive, prompting foreign investors to trim their exposure to emerging-market debt, including Indian bonds.
“The continued FPI selling through the FAR route reflects concerns around elevated crude prices, rupee depreciation, rising US Treasury yields and uncertainty over India’s interest-rate trajectory. Although the India-US 10-year yield differential has widened beyond 250 bps, this alone may not be sufficient to attract foreign investors,” said Kunal Sodhani, treasury head at Shinhan Bank.
The US 10-year Treasury yield hovered around 5.25% for much of October, close to a two-decade high, before easing to 4.93% on Friday. India’s benchmark 10-year government bond yield, meanwhile, closed at 7.41%, widening the yield differential between the two to 248 basis points from 195 bps at the beginning of the month.
The Reserve Bank of India’s recent rate hike and expectations of further tightening have also pushed domestic bond yields higher, exposing existing investors to mark-to-market losses.
“The recent RBI rate hike and expectations of further tightening have pushed domestic bond yields higher, but investors are also facing mark-to-market losses on existing holdings. Additionally, currency depreciation and hedging costs can significantly erode the attractive yield differential,” Sodhani added.
Market participants expect foreign selling to moderate if the rupee stabilises, crude oil prices ease, global bond yields soften and greater clarity emerges on the RBI’s interest-rate trajectory.
“Despite narrowing, the yield differential between US and Indian bonds remains insufficient to attract significant foreign inflows into debt markets. I remain cautious about debt inflows, as the rupee’s recent stability may be short-lived given persistent underlying risks. Elevated crude oil prices also continue to weigh on the market,” said Madhavankutty G, chief economist at Canara Bank.
Despite three consecutive months of selling, FPIs remain net buyers of government securities in FY27, with cumulative inflows of Rs 43,075 crore. These were driven largely by strong purchases in June and July following the government’s tax concessions for overseas investors and the RBI’s expansion of the FAR universe to include long-dated government bonds.