Rupee fall hits India bond draw for FPIs

The rupee depreciation and the narrow gap between returns on Indian government bonds and those on US bonds have kept foreign investors wary of Indian debt markets.

- Nischhal Agrawal

India's benchmark 10-year government bond yields 7.004%, compared with 4.435% on the US 10-year Treasury, leaving a spread of about 256 basis points, according to the latest available data.

The yield spread, around the start of the war, was at around 272 bps and dropped to 235 bps in March, before recovering. While spreads have improved compared to where they were in 2025, experts said they have historically been above 300 bps.

This, along with the rupee depreciating 3.4% against the dollar since the beginning of the West Asia war, made Indian bonds unattractive.

At a conference in Hong Kong last week, several foreign portfolio investors (FPIs) said the rupee's decline was making them reluctant to increase exposure to Indian assets, Mint reported on 25 May.

The caution is seen in investment flows. In this financial year, FPIs have been net sellers of $836 million in the general debt route and $490 million in the voluntary retention route (VRR), but have been net buyers of $448 million in the passive fully accessible route (FAR), NSDL data showed. Inflows via the last route are a result of Indian debt being included in Bloomberg and JP Morgan indices.