How finmin-RBI moves could bring at least $50 bn in foreign inflows, boost chances of inclusion in global bond indices
Foreign capital outflows taking place over the last two years, the West Asia conflict led to a greater challenge to the current account deficit
- Jun 8, 2026,
- Updated Jun 8, 2026 12:25 PM IST
The measures taken by the Reserve Bank of India and the Finance Ministry on June 5 are expected to encourage foreign investments in government bonds and provide support to the rupee. According to analysts, it could help bring in foreign inflows of at least $50 billion.
“Currently, the hedging costs are around 3%, and the FCNR (B) three-year deposit rate is around 3.5%. The domestic three-year term deposit rate is around 6.5%. Hence, bankers can offer closer to 6% on FCNR deposits and mobilise them,” said a report by Macquarie Capital on Monday. It further noted that as per its conversation with bankers, RBI and government measures in total could imply foreign exchange flows of $ 40-50 billion, which could help to stabilise the rupee.
Don't Miss: FPIs hold ₹74 lakh cr in India; tax relief on govt securities may boost foreign flows
Vishal Mahadevia, Chairman of the Strategic Working Group on Private Equity and Venture Capital of the US-India Strategic Partnership Forum, said the reform would bolster India’s case for inclusion in global bond indices, supporting sustained capital flows and deeper integration with global financial markets.
While the outflow of foreign investments from India’s equity and debt markets has become a challenge amidst the current West Asia crisis, this had started about two years ago. India’s financial markets have seen record outflows of foreign capital over the past two-and-a-half months, amid surging crude oil prices and a fast-depreciating Indian currency.
The combination of weak net FDI flows and waning FII interest in India is not altogether new; it’s been happening for the last two financial years. However, the West Asia conflict has sparked new worries as weak capital inflows put further pressure on the current account deficit, which was already on an upward trajectory because of rising crude oil prices.
The exodus from Dalal Street had, in fact, begun in 2025, when foreign portfolio investors (FPIs) pulled out $18.9 billion from India’s equity market. That trend seems to have gathered pace. Till May 22 this year, they have pulled out $23.85 billion, significantly more than all of 2025. Overall, in FY26, foreign investments—both direct and portfolio investments—recorded an outflow of $9.02 billion, as against an inflow of $4.52 billion in FY25.
“India’s external capital dependency has become more visible over the past two years with a sharp slowdown in net FDI flows and an increase in FPI outflows coinciding with a higher current account deficit on high global energy prices,” said a recent report by Kotak Institutional Equities. This is a big change from earlier, large capital inflows until FY24 offset India’s high structural trade and current account deficits. “This vulnerability may persist without a structural fix to high CAD,” it warned.
Analysts also point out that while Indian stocks have corrected amid the sell-off, valuations are still not cheap. That, coupled with the uncertain outlook, also makes FIIs wary.
Sunil Kumar, Partner, Tax and Regulatory Practice, EY India noted that FPI flows into India have exhibited persistent volatility over the past decade, with eight out of the last 10 years witnessing net outflows.
“This trend has intensified in the last two to three years, reflecting a more cautious global investment environment. In particular, FPI selling has accelerated in recent years, and prevailing trends indicate that the ongoing year is also likely to witness significant outflows, highlighting both the magnitude and the intermittent surges observed in capital outflows,” he said.
He noted that the pattern is driven by a combination of global and domestic factors. Currency depreciation has adversely impacted returns in dollar terms, eroding overall investment attractiveness. “At the same time, elevated US bond yields, about 4.5% for 10-year Treasuries, have emerged as a relatively attractive low-risk alternative for investors, thereby reducing the incentive to allocate capital to emerging markets such as India,” he pointed out.
The measures taken by the Reserve Bank of India and the Finance Ministry on June 5 are expected to encourage foreign investments in government bonds and provide support to the rupee. According to analysts, it could help bring in foreign inflows of at least $50 billion.
“Currently, the hedging costs are around 3%, and the FCNR (B) three-year deposit rate is around 3.5%. The domestic three-year term deposit rate is around 6.5%. Hence, bankers can offer closer to 6% on FCNR deposits and mobilise them,” said a report by Macquarie Capital on Monday. It further noted that as per its conversation with bankers, RBI and government measures in total could imply foreign exchange flows of $ 40-50 billion, which could help to stabilise the rupee.
Don't Miss: FPIs hold ₹74 lakh cr in India; tax relief on govt securities may boost foreign flows
Vishal Mahadevia, Chairman of the Strategic Working Group on Private Equity and Venture Capital of the US-India Strategic Partnership Forum, said the reform would bolster India’s case for inclusion in global bond indices, supporting sustained capital flows and deeper integration with global financial markets.
While the outflow of foreign investments from India’s equity and debt markets has become a challenge amidst the current West Asia crisis, this had started about two years ago. India’s financial markets have seen record outflows of foreign capital over the past two-and-a-half months, amid surging crude oil prices and a fast-depreciating Indian currency.
The combination of weak net FDI flows and waning FII interest in India is not altogether new; it’s been happening for the last two financial years. However, the West Asia conflict has sparked new worries as weak capital inflows put further pressure on the current account deficit, which was already on an upward trajectory because of rising crude oil prices.
The exodus from Dalal Street had, in fact, begun in 2025, when foreign portfolio investors (FPIs) pulled out $18.9 billion from India’s equity market. That trend seems to have gathered pace. Till May 22 this year, they have pulled out $23.85 billion, significantly more than all of 2025. Overall, in FY26, foreign investments—both direct and portfolio investments—recorded an outflow of $9.02 billion, as against an inflow of $4.52 billion in FY25.
“India’s external capital dependency has become more visible over the past two years with a sharp slowdown in net FDI flows and an increase in FPI outflows coinciding with a higher current account deficit on high global energy prices,” said a recent report by Kotak Institutional Equities. This is a big change from earlier, large capital inflows until FY24 offset India’s high structural trade and current account deficits. “This vulnerability may persist without a structural fix to high CAD,” it warned.
Analysts also point out that while Indian stocks have corrected amid the sell-off, valuations are still not cheap. That, coupled with the uncertain outlook, also makes FIIs wary.
Sunil Kumar, Partner, Tax and Regulatory Practice, EY India noted that FPI flows into India have exhibited persistent volatility over the past decade, with eight out of the last 10 years witnessing net outflows.
“This trend has intensified in the last two to three years, reflecting a more cautious global investment environment. In particular, FPI selling has accelerated in recent years, and prevailing trends indicate that the ongoing year is also likely to witness significant outflows, highlighting both the magnitude and the intermittent surges observed in capital outflows,” he said.
He noted that the pattern is driven by a combination of global and domestic factors. Currency depreciation has adversely impacted returns in dollar terms, eroding overall investment attractiveness. “At the same time, elevated US bond yields, about 4.5% for 10-year Treasuries, have emerged as a relatively attractive low-risk alternative for investors, thereby reducing the incentive to allocate capital to emerging markets such as India,” he pointed out.