Foreign investors are pulling back from Indian bonds at the fastest pace since at least June, as climbing U.S. Treasury yields reduce the appeal of the country’s fixed-income assets.
Global funds sold a net 49.6 billion rupees ($588 million) in Fully Accessible Route (FAR) bonds last week, marking the largest outflow since these securities were included in JPMorgan Chase & Co.’s major emerging-market bond index in June, according to data from the Clearing Corporation of India Ltd.
So far this month, foreign investors have sold off a total of 87.5 billion rupees of Indian debt, driven by expectations that the interest rate gap between the U.S. and India will continue to narrow. U.S. Treasury yields have surged following Donald Trump’s election win, with market participants betting that the Federal Reserve may slow its rate-cutting cycle amid rising inflationary pressures from the incoming president’s economic policies.
“The Indian bond market has substantially outperformed U.S. and European government bond markets over the past year, but the yield spread between India and these global markets is now at historically tight levels,” said Rajeev De Mello, a global macro portfolio manager at Gama Asset Management SA.
On Monday, the yield spread between India’s 10-year bonds and comparable U.S. Treasuries narrowed to approximately 243 basis points, the tightest in over a year.
Additionally, a more hawkish stance by the Reserve Bank of India (RBI), which has resisted rate cuts in response to a 14-month high in inflation during October, further limits potential returns from local bonds.
Despite these challenges, the pace of selling may slow as JPMorgan plans to increase India’s bond market weighting to 6% in its key emerging-market bond index by the end of November. Both Bloomberg and FTSE Russell are also expected to add India’s bonds to their respective emerging-market benchmarks in 2025.
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