Trump Trade dampens FPIs’ interest in India’s debt market
A stronger US dollar along with rising US bond yields have dampened the appeal of Indian debt for Foreign Portfolio Investors (FPIs), even as India’s global bond inclusion narrative remains intact, said fixed income market experts and economists.
After infusing a record ₹1.65 lakh crore into Indian debt markets last calendar year—largely driven by India’s inclusion in JP Morgan’s Global Emerging Market Government Bond Index— FPIs have started the new year on a cautious note. They have offloaded government bonds worth ₹11,000 crore as of January 17, signalling a shift in preference toward safer US assets over Indian debt in the wake of Trump trade, according to experts.
Anitha Rangan, Economist, Equirus, said: “After witnessing close to ~$21.3 billion of inflows from Sept’23-Sept’24, incremental flows have moderated with shift in global dynamics driving uncertainty. Predominantly a rise in US yields along with Rupee depreciation (led by dollar strengthening), has driven a pause”.
Prospectively, while fundamental drivers such as fiscal consolidation, relative growth attractiveness, macro stability along with prospects of rating upgrade remain high, near term flows could still be tepid until interest rate differentials are attractive, she added.
V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said: “Since US bond yields are attractive, FPIs have been sellers in the debt market, too. A reversal of the FPIs flows will happen only after the market signals peaking of the dollar and US bond yields followed by their decline. This, in turn, will depend on President Trump’s tariff policies which presently are not yet clear.”
Shaken, not stirred
Mahendra Jajoo, Chief Investment Officer-Fixed Income, Mirae Asset Investment Managers, said that India’s global bond index inclusion story has unfolded in line with expectations. The story is very much intact. For now though, due to other immediate factors, it has now become a side story, but will bounce back someday, he said.
“The long term story on bond inclusion is intact, but there would be phases of slow growth when there are structural developments. Policies need to be reviewed and tweaked as experiences are gained”, he said.
Overall story has, for now, been in a way “high-jacked” by new hot issues such as Trump trade, global central banks rate cuts and domestic banks fighting for deposits etc. India bond inclusion has become a side issue for now.
“What could have been a very big thing has become subdued because of attendant factors. Had larger index players quickly come to include it and there was no active discouragement from RBI, then the bond inclusion story would have been even more pronounced”, Jajoo said.
Once US fed cut happens, FPI flows would continue to improve as there is strong India story and that is not going to change, Jajoo said.
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S P Sharma, Chief Economist, PHDCCI said: “Over the past two months, the growth of US 10-year bond yields has significantly outpaced that of India. The US bond yield rose from 4.28 per cent to 4.77 per cent, reflecting a 11 per cent growth, while India’s bond yield increased from 6.79 per cent to 6.92 per cent, registering a modest 4 per cent growth. This divergence highlights a growing preference for US bonds, driven by higher yields and perceived stability”.
At this critical juncture, with potential changes in the US Federal Reserve’s policy stance, heightened volatility in global financial markets can’t be ruled out, he added.
Shriram Ramanathan, CIO-Fixed Income, HSBC Mutual Fund, said since the JP Morgan index inclusion announcement in September 2023, FPIs have bought a net $18 billion of Indian Government Bonds (IGBs).
HSBC Mutual Funds expect about $4-5 billion of inflows from funds tracking the Bloomberg Barclays EM Bond index post the incorporation of IGBs in Bloomberg EM local currency Government indices, starting January 2025.
India’s inclusion in FTSE Russell Index — to play out from September 2025 – to result in inflows of $3-5 billion into IGBs.
“Overall we expect total index flows of $35-40 billion by March 2026, with FPI ownership reaching 4 per cent”, Ramanathan added.
