It was always talked about that India’s premium valuation, subdued corporate earnings growth in 2025-26, and lack of AI-led growth weighed on FII sentiment towards the domestic market. However, one less-discussed factor has been the rise in global bond yields, which has also reduced the relative attractiveness of Indian assets. Foreign investors have not only stayed away from Indian equities but have also shown caution towards the domestic debt market. This has been one of the key reasons behind the sharp depreciation of the rupee, which weakened by ₹10 against the US dollar over the past year to 94 today, a 12% fall in 12 months.
Rupee vs Euro vs Yen vs Chinese Yuan
The real return offered by INR bonds is not lucrative enough considering the underlying risk. The rupee carries a higher hedging cost compared with currencies such as the euro, yen and the Chinese yuan, adding to the total cost of forex transactions. To partially address these issues, the government has announced tax benefits for foreign investors, including NRIs, in government bonds. However, more measures are required, as India needs to offer either stronger & stable growth or enough incentives to attract foreign capital. Extending such tax benefits to a broader set of investment categories could help improve investor interest.
For instance, an average 10-year corporate bond yield of above 5% in the US and around 4% in Europe, supported by relatively strong currencies, compares unfavourably with a taxable and volatile INR offering a corporate yield of around 7.75%. In a volatile global environment marked by inflationary pressures and geopolitical risks, developed economies’ financial markets performed well, while emerging markets were affected, and India was among the most hit. At the same time, a hawkish global central bank stance and a rising interest-rate cycle made India’s bond market less attractive to foreign investors. The RBI and the government may have aimed to keep domestic interest rates relatively accommodative to support local borrowing and investments. While this has helped domestic funding conditions, it has reduced India’s appeal from the perspective of foreign investors seeking superior risk-adjusted returns.
The sustained rise in bond yields across major economies, like Japan, also had a negative impact on India through a reversal in yen carry trades. Equity investment directly and indirectly through Japan into India reversed over the past year. Japan, which was once a near-zero-yield market, has seen its 10-year government bond yield rise sharply over the past five years to around ~2.6%. At the same time, its economic growth has become more resilient under the new policy framework. Over the last 12 months, FIIs have invested more than US$100 billion in Japan, while selling around US$38 billion in India. The cheap Japanese money deployed into emerging markets, especially short-to-medium-term bets, is on a meaningful reversal. As per NSDL data based on the month of May, foreign assets under custody, holdings by Japanese investors in India, have declined by around 12% over the past year. A similar trend is also visible among other key investor geographies such as the US, Singapore, and Mauritius.
FII outflows
FII net purchases in India’s debt market have declined sharply from ₹1.07 lakh crore in 2024 to a net outflow of ₹19,888 crore in 2025, before turning modestly positive at ₹7,711 crore in 2026 to date. The equity market has witnessed an even sharper deterioration, with FII flows moving from a net outflow of ₹3,245 crore in 2024 to ₹1.62 lakh crore in 2025 and nearly ₹3 lakh crore in 2026 to date. To reverse this trend, the real interest rate and equity earnings differential between India and global markets needs to become more favourable. India must deliver stronger corporate earnings growth and create compelling investment opportunities in areas linked to new technologies and productivity-led expansion.
The persistence of a hawkish policy stance by the US Federal Reserve could delay the emergence of a supportive environment for Indian financial markets. However, India’s well-expected inclusion in the Bloomberg Global Aggregate Index may provide some relief by attracting incremental debt inflows. A faster decline in crude oil prices to $70 and moderation in geopolitical risks would support the domestic economy, reduce global risk aversion, and help soften country interest rates while sustaining a healthy real return ratio should be the crux of it. This can boost both debt and equity inflows from the foreign investors.
The author Vinod Nair is the Head of Research at Geojit Investments Limited.
Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.
