FPIs Pour $5.8 Billion Into Bonds Despite Equity Exit

FPIs Invest Nearly $6 Billion in Indian Bonds Despite Equity Outflows

Foreign investors poured about $5.8 billion into Indian debt in June, outpacing their equity selling, as tax reforms and a wider investment route made government bonds far more attractive.

By Naina, 1st July 2026

Foreign portfolio investors (FPIs) invested nearly $6 billion in Indian bonds in June, even as they continued to pull money out of equities, marking a notable divergence in foreign capital flows. FPIs infused a net of about $5.8 billion, roughly ₹55,518 crore, into the domestic debt market during the month, surpassing their equity outflows for the first time this year. The bond buying was driven by strong demand for government securities, following a series of tax and regulatory measures by the government and the Reserve Bank of India to attract foreign capital. The shift signals renewed foreign confidence in Indian debt, even as global uncertainty, a weaker rupee, and high valuations continued to weigh on their appetite for Indian stocks.

The contrast is striking. While foreign investors have been heavy sellers of Indian equities through 2026, offloading a net of around $29 billion in the first half of the year, they turned decisively positive on bonds in June. The turnaround reflects policy reforms that improved post-tax returns on government securities, attractive domestic yields, and the prospect of Indian bonds gaining greater weight in global indices. For an economy seeking to ease pressure on its balance of payments and currency, the return of foreign capital to the debt market is a welcome development. Here is what drove the bond inflows, why equities remain under pressure, and what it means going forward.

The Debt Surge

June saw a sharp rebound in bond inflows. FPIs invested a net of roughly ₹55,518 crore, about $5.8 billion, into Indian debt during the month, the strongest showing in over a year. The bulk came through the general investment route and the fully accessible route, with additional inflows via the voluntary retention route. Investment through the fully accessible route alone accounted for a large share of the entire year's inflows via that channel, underscoring the scale of the June recovery. This surge reversed the subdued or negative foreign activity of earlier months, signalling a clear return of overseas investor interest in Indian government securities after a difficult start to the year.

The Equity Exodus

Equities told the opposite story. Foreign investors offloaded a net of around $29 billion, roughly ₹2.74 lakh crore, from Indian stocks in the first half of 2026, already exceeding the outflows for all of 2025, with June alone seeing over $5 billion in equity selling. The sustained exit has pushed FPI ownership of Indian listed stocks to a multi-year low, even as domestic institutional investors, backed by record monthly retail inflows, have surpassed foreign investors' share of the market for the first time in over a decade. This domestic buying has cushioned the impact of foreign selling, preventing sharper declines in the indices despite the persistent outflows.

The Great Divergence

The divergence between debt and equity flows is the defining feature. For the first time this year, foreign inflows into Indian bonds in a single month exceeded their equity outflows, suggesting a rotation within foreign portfolios rather than a wholesale exit from India. Investors appear to be favouring the relative safety and improved returns of Indian government debt over equities, which face valuation and currency headwinds. This split reflects a nuanced view: caution on Indian stocks amid global uncertainty, but growing confidence in Indian bonds following policy reforms. The tide, at least in the debt market, appears to be turning in India's favour.

The Policy Catalyst

Policy measures were the key trigger. In early June, the government exempted FPIs from income tax on both interest and capital gains from investments in government securities, applied retrospectively, effectively removing significant tax hurdles and improving post-tax returns. The Reserve Bank simultaneously expanded the fully accessible route to include all new issuances of long-tenor government bonds, spanning 15-, 30-, and 40-year maturities, along with sovereign green bonds, and withdrew limits under the general route. Additional measures, including concessional swaps for external borrowings and a special deposit window, were aimed at attracting foreign capital. Together, these reforms materially strengthened the investment case for Indian government bonds.

The Yield Appeal

Attractive yields reinforced the appeal. Indian ten-year government bond yields, hovering around 6.75 percent, offer a compelling return, particularly after domestic yields fell sharply during June, boosting the value of existing bonds. For foreign investors, the combination of healthy yields, improved post-tax returns following the tax exemptions, and relative macroeconomic stability makes Indian debt an appealing destination. The anticipated inclusion of Indian government bonds in a major global bond index by the end of the year adds a further structural draw, as it is expected to channel significant passive inflows. These factors combined to make Indian government securities notably more attractive to overseas investors in June.

Why Equities Are Being Sold

Several forces have driven the equity exodus. A depreciating rupee erodes the dollar value of returns for foreign investors, while a strong US dollar and elevated US bond yields have made American assets more attractive, drawing capital away from emerging markets. Indian equity valuations, higher than many Asian peers, have prompted profit-taking, and global funds have been rotating toward artificial-intelligence and semiconductor-linked opportunities in markets like Taiwan and South Korea. Geopolitical uncertainty stemming from the conflict in West Asia added to the risk-off mood. Each factor alone would be manageable, but together they triggered one of the largest foreign equity selloffs India has seen.

The Balance of Payments Angle

The flows carry macroeconomic significance. Sustained foreign equity outflows and a weaker rupee had raised concerns about India's balance of payments, prompting the recent measures to attract capital. Analysts estimate India needs substantial monthly capital inflows to balance its external accounts, and the return of foreign money to the debt market, alongside other measures, helps narrow that gap and support the currency. The reforms are also seen as a signal that policymakers are actively working to shore up external stability. While bond inflows alone may not fully offset equity outflows and a widening trade deficit, they represent an important source of foreign capital at a sensitive time for the economy.

The Road Ahead

The outlook points to continued strength in debt inflows, with more caution on equities. Analysts expect foreign investment in Indian bonds to remain positive, supported by the policy reforms, attractive yields, and the prospect of global index inclusion, though the pace may vary with the evolving global environment. Equity flows are likely to stay subdued until valuation, currency, and global risk concerns ease. Much will depend on the trajectory of oil prices, the rupee, US yields, and the monsoon's impact on inflation and interest-rate expectations. For now, the divergence underscores a rebalancing of foreign capital toward Indian debt, offering the economy welcome support even as equities await a turn in sentiment. This is analysis, not investment advice.

Frequently Asked Questions

How much did FPIs invest in Indian bonds in June?
Foreign portfolio investors infused a net of about $5.8 billion, roughly ₹55,518 crore, into Indian debt in June 2026, the strongest monthly inflow in over a year, surpassing their equity outflows for the first time this year.

Why are FPIs buying Indian bonds?
Policy reforms in early June, including tax exemptions on government-securities interest and capital gains and an expansion of the fully accessible route to long-tenor bonds, improved post-tax returns. Attractive yields around 6.75 percent and expected global index inclusion added to the appeal.

Why are FPIs still selling Indian equities?
A depreciating rupee, a strong US dollar, elevated US bond yields, high Indian valuations versus Asian peers, a global rotation toward AI and semiconductor markets, and geopolitical uncertainty have driven a large foreign equity selloff, exceeding $29 billion in the first half of 2026.

What is the fully accessible route?
The fully accessible route, or FAR, allows foreign investors to invest in select government bonds without any caps. It was recently expanded to include all new issuances of 15-, 30-, and 40-year government securities and sovereign green bonds.

Why do these flows matter?
Foreign bond inflows provide important capital that helps ease pressure on India's balance of payments and supports the rupee, especially amid sustained equity outflows and a widening trade deficit. They also signal renewed foreign confidence in Indian debt.