Amid large FPI outflows from equity, debt attracted inflows in FY26

Foreign investors pulled out Rs 1.37 trillion from equities in FY26, while debt saw modest inflows supported by attractive yields and expectations of global index inclusion

Foreign portfolio investor (FPI) flows into Indian markets have remained divergent in the current financial year 2025-26 (FY26), with equities facing sustained selling pressure even as the debt segment has managed to retain modest inflows.

 

So far in FY26, foreign investors have pulled out net ₹1.37 trillion from equities, reflecting risk aversion amid geopolitical tensions, and increased volatility in emerging market (EM) currencies. On the other hand, the debt segment witnessed a net inflow of ₹13,964 crore in the same period, supported by relatively attractive domestic yields despite the Reserve Bank of India’s (RBI’s) rate easing cycle coupled with rupee weakness. 

Market participants said the resilience in debt flows during the financial year was largely driven by yield-seeking investors and passive allocations on hopes of India’s inclusion in Bloomberg Global Index. Supply pressures have also kept yields elevated, making Indian debt relatively appealing on a risk-adjusted basis.

 

However, the scale of inflows remained limited. “There are still investors looking at India from a yield play perspective, which is why some money is coming in. But the quantum is not significant,” said the treasury head at a private bank.

 

The yield on the benchmark 10-year government bond rose by 14 basis points (bps) in FY26, despite a cumulative 100 bps rate cut by the domestic rate-setting panel.

 

However, the momentum has weakened in March with net inflows appearing largely flat. This suggests a lack of strong conviction among foreign investors at current levels, said market participants. In March, FPIs net bought ₹742 crore worth of domestic debt.

 

“The sell-off in the current month has not been India-specific; FPIs tend to reduce exposure across EMs at the same time, and India, despite being a key beneficiary earlier, has also seen some impact,” a market participant said.

 

While the pace of outflows may moderate going ahead, a sharp revival in inflows appears unlikely in the near term. On the prospects of further passive inflows, particularly from Bloomberg bond index inclusion, market participants said expectations have been tempered. “(Inclusion in) June is unlikely, and given the conditions flagged earlier, it may be difficult to meet the requirements this year unless there are meaningful changes,” said a market participant.

 

In January, Bloomberg Index Services said it has postponed the inclusion of Indian bonds in its Global Aggregate Index, citing the need for further assessment of operational and market infrastructure issues. It said an update will be provided in mid-2026.

 

When JPMorgan had announced in September 2023 that Indian bonds would be phased into the index starting June 28, 2024, and reaching the full 10 per cent weighting by March 31, 2025, at 1 per cent per month, analysts predicted passive inflows of $20 billion-25 billion, with bullish scenarios extending up to $30 billion when including active repositioning. Much of the inflows occurred in the months leading up to the actual inclusion between September 2023 and June 2024, net inflows stood at approximately ₹92,302 crore. This indicated significant front-loading by investors who anticipated the move and adjusted their portfolios ahead of schedule.