Priyanka Tiwari
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Foreign Portfolio Investors (FPIs) have shifted their India debt market stance from optimism to a more bearish outcome, becoming net sellers after withdrawing over $2.27 billion in April 2025, the worst monthly outflow since May 2020 and forestalling an inflow streak that was extended over the past five months.
Prognostications state that FPIs are likely to partially attribute the outflow to a declining spread between Indian and US government bonds. FPIs are observed to have a narrower yield curve spread for the US and Indian bonds, with India’s 10-year bond yield dipping from 6.6% to 6.33% and the US 10-year gaining from 3.99% to 4.35%. This results in a yield spread of around 200 basis points, the narrowest since September 2004, according to Bloomberg data.
Focused changes in macroeconomic factors drove Soumyajit Niyogi of India Ratings & Research target yield disparities. He emphasized on the low yield gap created ‘due to aggressive interest rate policies’ and the new compelling value emerging for US assets, causing for a shift in investments away from India.
Surge in US Yields Driven by Inflation and Volatility in the Market
Increased inflation, heightened volatility in the markets, and negative tariff policy approaches are putting pressure on US bonds. These issues have made it less appealing for the Fed to consider cutting interest rates for the time being.
Domestic Market Fundamentals Still Favorable
Other than global headwinds, India’s domestic debt market continues to offer gaps of opportunity. With the support of the Reserve Bank of India, softening inflation incrasing expectations of future rate cuts, and ample liquidity, the environment remains counterating towards the issuance of currency bonds.
Profit Taking in Indian FPIs and Strengthening of the Currency
TP according to Tripathi suggest that GEPIs took the opportunity to book profits on strong rupee positionality. Also considering the repo rate settling at an assumed range of 5.25%-5.50% with 10 year bond yield hovering at a 100 basis points premium, investors preferred to exit at these yields.
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