Why FPIs poured money into India’s debt market in June even as they sold equities
FPIs invested around $5.8 billion in India’s debt market in June 2026, even as they sold $5.16 billion in the equity market
- Jul 1, 2026,
- Updated Jul 1, 2026 3:05 PM IST
Foreign institutional investors have been massively selling in India’s equity market, amid the global geopolitical uncertainties fuelled by the war in West Asia and the depreciation in the rupee against the US dollar. But the tide seems to be turning in the debt market, with June seeing more FII inflows in debt, than there were outflows in equity.
Foreign portfolio investors offloaded $29.28 billion (Rs 2.74 lakh crore) in the equity market in the first six months of 2026, according to NSDL. This is significantly more than the $18.90 billion (Rs 1.66 lakh crore) that they sold through the entire 2025 calendar year. In June 2026 alone, they sold $5.16 billion (Rs 49,340 crore).
In comparison, FPIs have invested around $6.8 billion (Rs 63,784 crore) in the debt market this year. In June 2026, they picked up about $5.8 billion (Rs 55,518 crore), which included about $3.2 billion under the general investment route and $2.27 billion under FAR. In May, on the other hand, they had sold $10 million under general limit, and offloaded $161 million via the voluntary retention route, while buying $462 million in debt securities under the fully accessible route (FAR).
The general limit for FPI investment in debt is capped as a total outstanding stock of securities. Under the FAR, FPIs are allowed to invest in select government bonds without any caps. What’s bringing back FPIs back to the debt market?
A major development has been on the policy side. In the backdrop of the sharp depreciation in the rupee earlier this year, the government and the Reserve Bank introduced several measures to attract long-term institutional investors such as pension funds, insurance companies, and sovereign wealth funds, to the debt market.
The measures included tax exemption on interest income, long-term and short-term capital gains and expansion of specified securities under FAR. This would lead to more stable and sustained capital inflows, according to the government.
“Overall, one can say the operating environment for investing into debt has improved for FPIs and hence the increase in inflows,” said Puneet Pal, head-fixed income, PGIM India Mutual Fund.
MUST READ: What’s behind the drought in foreign fund flows?
Separately, with signs of peace between Iran and US, crude oil prices, which hit $120 per barrel in late April, have cooled to around $70 per barrel now, in turn reducing the pressure on India’s fiscal and current account deficit.
The rupee, which hit a record low of 96.96 against the US dollar in May has also rebounded to above 95 now. All these developments have boosted FII sentiments and hence the inflows in June, say analysts.
“One they are playing for the currency appreciation. They are feeling the rupee will appreciate. Additionally, the government withdrew the tax. Also, with oil prices coming down, the expectation is that the rates may not go up for now,” Murthy Nagarajan, head-fixed income at Tata Mutual Fund, noted.
Typically, when the rupee strengthens, the country’s import costs come down, in turn easing pressures on the deficit. Importantly, it also boosts dollar denominated returns for FPIs. That in turn triggers more investments.
Importantly, fund managers note that the recent reforms announced to attract FPIs in the debt market could ultimately open the doors for the inclusion of Indian government debt in Bloomberg’s flagship Global Aggregate Index. The proposal has been under review by Bloomberg for some time, and should it go through, India’s debt market could attract more passive fund flows.
“The measures by the government and RBI have increased the probability of inclusion of Indian government bonds coming under FAR into the Bloomberg Global aggregate Bond Index, which can lead to $25-30 billion of inflows over the next one year,” said Pal.
Pal expects FPI inflows to remain positive, though the quantum of inflows may vary with the evolving global scenario. He noted that globally rates had risen and yields were sustaining at elevated levels, while Indian yields had come down sharply in June.
Nagarajan also expects the inclusion of Indian government bonds in the Bloomberg Global aggregate Bond Index to happen by the end of 2026.
Currently, India’s 10-year government bond yields are around 6.75 per cent, which should hold. With oil prices cooling, the pressure on the Reserve Bank to raise rates immediately will reduce, although it will still be closely watching monsoon-related developments and how weak rains may affect food prices this year.
In June 2026, the Reserve Bank monetary policy committee (MPC) left the repo rate unchanged at 5.25 per cent. Nagarajan still expects the MPC to raise rates by 50-75 basis points, but it may not do so immediately in August, but possibly in October, after it assesses the food inflation impact.
MUST READ: SIFs off to a strong start as every eligible fund beats its benchmark; JioBlackRock joins the race
PGIM’s Pal is also expecting around 50-75 bps rate hike in the second half of the current financial year.
Apart from the FPI inflows into the debt market, the RBI announcing special window for foreign currency non-resident (FCNR) (B) deposits and external commercial borrowings, enabling banks to access foreign funds at lower cost, is expected to lead to inflows of around $50 billion in 2026-27, which should also strengthen India’s forex reserves.
Foreign institutional investors have been massively selling in India’s equity market, amid the global geopolitical uncertainties fuelled by the war in West Asia and the depreciation in the rupee against the US dollar. But the tide seems to be turning in the debt market, with June seeing more FII inflows in debt, than there were outflows in equity.
Foreign portfolio investors offloaded $29.28 billion (Rs 2.74 lakh crore) in the equity market in the first six months of 2026, according to NSDL. This is significantly more than the $18.90 billion (Rs 1.66 lakh crore) that they sold through the entire 2025 calendar year. In June 2026 alone, they sold $5.16 billion (Rs 49,340 crore).
In comparison, FPIs have invested around $6.8 billion (Rs 63,784 crore) in the debt market this year. In June 2026, they picked up about $5.8 billion (Rs 55,518 crore), which included about $3.2 billion under the general investment route and $2.27 billion under FAR. In May, on the other hand, they had sold $10 million under general limit, and offloaded $161 million via the voluntary retention route, while buying $462 million in debt securities under the fully accessible route (FAR).
The general limit for FPI investment in debt is capped as a total outstanding stock of securities. Under the FAR, FPIs are allowed to invest in select government bonds without any caps. What’s bringing back FPIs back to the debt market?
A major development has been on the policy side. In the backdrop of the sharp depreciation in the rupee earlier this year, the government and the Reserve Bank introduced several measures to attract long-term institutional investors such as pension funds, insurance companies, and sovereign wealth funds, to the debt market.
The measures included tax exemption on interest income, long-term and short-term capital gains and expansion of specified securities under FAR. This would lead to more stable and sustained capital inflows, according to the government.
“Overall, one can say the operating environment for investing into debt has improved for FPIs and hence the increase in inflows,” said Puneet Pal, head-fixed income, PGIM India Mutual Fund.
MUST READ: What’s behind the drought in foreign fund flows?
Separately, with signs of peace between Iran and US, crude oil prices, which hit $120 per barrel in late April, have cooled to around $70 per barrel now, in turn reducing the pressure on India’s fiscal and current account deficit.
The rupee, which hit a record low of 96.96 against the US dollar in May has also rebounded to above 95 now. All these developments have boosted FII sentiments and hence the inflows in June, say analysts.
“One they are playing for the currency appreciation. They are feeling the rupee will appreciate. Additionally, the government withdrew the tax. Also, with oil prices coming down, the expectation is that the rates may not go up for now,” Murthy Nagarajan, head-fixed income at Tata Mutual Fund, noted.
Typically, when the rupee strengthens, the country’s import costs come down, in turn easing pressures on the deficit. Importantly, it also boosts dollar denominated returns for FPIs. That in turn triggers more investments.
Importantly, fund managers note that the recent reforms announced to attract FPIs in the debt market could ultimately open the doors for the inclusion of Indian government debt in Bloomberg’s flagship Global Aggregate Index. The proposal has been under review by Bloomberg for some time, and should it go through, India’s debt market could attract more passive fund flows.
“The measures by the government and RBI have increased the probability of inclusion of Indian government bonds coming under FAR into the Bloomberg Global aggregate Bond Index, which can lead to $25-30 billion of inflows over the next one year,” said Pal.
Pal expects FPI inflows to remain positive, though the quantum of inflows may vary with the evolving global scenario. He noted that globally rates had risen and yields were sustaining at elevated levels, while Indian yields had come down sharply in June.
Nagarajan also expects the inclusion of Indian government bonds in the Bloomberg Global aggregate Bond Index to happen by the end of 2026.
Currently, India’s 10-year government bond yields are around 6.75 per cent, which should hold. With oil prices cooling, the pressure on the Reserve Bank to raise rates immediately will reduce, although it will still be closely watching monsoon-related developments and how weak rains may affect food prices this year.
In June 2026, the Reserve Bank monetary policy committee (MPC) left the repo rate unchanged at 5.25 per cent. Nagarajan still expects the MPC to raise rates by 50-75 basis points, but it may not do so immediately in August, but possibly in October, after it assesses the food inflation impact.
MUST READ: SIFs off to a strong start as every eligible fund beats its benchmark; JioBlackRock joins the race
PGIM’s Pal is also expecting around 50-75 bps rate hike in the second half of the current financial year.
Apart from the FPI inflows into the debt market, the RBI announcing special window for foreign currency non-resident (FCNR) (B) deposits and external commercial borrowings, enabling banks to access foreign funds at lower cost, is expected to lead to inflows of around $50 billion in 2026-27, which should also strengthen India’s forex reserves.