Foreign portfolio investors (FPIs) have significantly slowed their purchases of Indian debt over the past two weeks, marking a sharp cooling in demand after a period of intense buying. Data from the Clearing Corporation of India shows that daily average inflows into Indian debt dropped to approximately ₹300 crore in July, a stark decline from the nearly ₹3,000 crore daily average seen in June. This shift in momentum comes as global investors reassess their positions in Indian government securities, particularly those under the Fully Accessible Route (FAR).
The primary driver of this caution is the evolving interest rate outlook in the United States. While the Federal Reserve recently held its benchmark rate steady at 3.50% to 3.75%, the committee showed unexpected signs of division, with three regional presidents dissenting in favor of a rate hike. This hawkish tone has led global markets to price in the possibility of further rate increases later this year. As US Treasury yields become more attractive, they offer a lower-risk alternative to emerging market debt, prompting investors to reallocate capital away from India.
Adding to the market's unease is the recent decision by Bloomberg to defer the inclusion of Indian bonds in its global index. Many investors had accumulated positions in Indian debt in anticipation of this inclusion, which would have triggered mandatory buying from passive global funds. With the delay, some of these investors are now lightening their holdings, contributing to the recent taper in inflows.
Market participants are now closely watching the Reserve Bank of India’s upcoming monetary policy announcement for signals on how the central bank might navigate these external pressures. While cooling oil prices have provided some relief to the domestic economy, the uncertainty surrounding global interest rates remains a key medium-term risk. For now, the bond market is in a wait-and-see mode, balancing domestic economic strength against the pull of higher yields in the United States.