FPIs double down on Indian debt, keep equity bets on hold

Foreign portfolio investors (FPI) invested a record ₹41,773 crore in June in securities that are included in the fully accessible route (FAR), CCIL data showed. On the other hand, they withdrew ₹49,340 crore from Indian equities, NSDL data showed. This year, on a net basis, FPI inflows into debt stood at ₹51,178 crore, while equities showed an aggregate outflow of ₹2.73 lakh crore until last week.

“FPIs are watchful on equities, and though they have turned mildly positive, there is still a question of whether these flows would be sustainable,” said Madan Sabnavis, chief economist at Bank of Baroda. “They remain watchful of how our companies perform in Q1, especially since the full impact of the Iran war would be visible in these earnings.”

For FPIs, sovereign debt has lately emerged the preferred asset class, especially after New Delhi waived capital gains taxes and interest on investment returns and expanded the investable universe to include long bonds. These measures have boosted expectations that local debt will now be included in Bloomberg’s global aggregate index, which directs hundreds of billions of dollars in passive funds into eligible debt securities worldwide.

Agencies

Indices Weighed Down

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Mumbai-listed equities, where core company earnings and relative aggregate valuations vis-a-vis competing economies fundamentally dictate overseas fund flows, have not been as lucky.

Indian equities have struggled to generate meaningful returns this year, with the broadest gauges that draw overseas funds underperforming several global peers. The Nifty 50 has declined more than 8% so far in 2026, while the broader market has been weighed down by FPI outflows, geopolitical uncertainty and circumspect earnings expectations.

The information technology sector, long regarded as one of the two firm favourites (besides banking, financial services and insurance) with overseas funds, has emerged as one of the biggest laggards. The Nifty IT index has slumped nearly 30% so far this year.

Peace Plays a Part
FPIs have been less frequent sellers of Mumbai-listed equities in June, after the peace process in West Asia caused global oil prices to slide and helped ease the pressure on the local currency.

A visible reversal in the rupee’s southward trajectory, by contrast, has helped burnish the allure of Indian sovereign debt that has seen a 30-basis point reduction in benchmark yields over the past few weeks. Softening market yields have obviated the need for policy rate increases despite inflationary pressures stemming from the West Asian war.

The rupee strengthened from record lows of 96.96 late in May to 95.21 as of July 3.

“Because the rupee was so volatile and rapidly depreciating, debt investors were averse. But now, there is greater confidence and investors think this is a good opportunity,” said Gaura Sen Gupta, chief economist at IDFC First Bank. “Plus, there are high expectations that the bonds will be included in the Bloomberg index this month. That will add to debt inflows.”

The index review panel at Bloomberg is scheduled to meet in July.

For Indian bonds, risks, however, haven’t entirely vanished.

First, a hawkish US Federal Reserve could increase bond yields in the world’s largest debt market, prompting investors to pull out funds from emerging markets like India. Another negative trigger is a further deferral of the decision to include Indian bonds in the Bloomberg gauge, market experts said.

The surge in overseas debt inflows haven’t caused a corresponding increase in India’s foreign exchange reserves. “This is because these dollars go into banks books, and unlike in the FCNR(B) and ECB scheme, there is no concessional swap facility for dollars from FAR inflows,” said Sabnavis of Bank of Baroda.