The measures come as Indian bonds gain inclusion in major global bond indices, an expected trigger for substantial foreign inflows that has yet to fully materialize.
Experts say the latest regulatory moves should be seen in the context of India’s global bond index inclusion.
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In March 2024, Bloomberg announced the addition of Indian government bonds to its emerging market index. This followed JP Morgan’s decision to include securities available under the Fully Accessible Route (FAR) in its GBI-EM Global index suite from 28 June 2024.
Additionally, Indian government bonds are set to join the FTSE Emerging Markets Government Bond Index (EMGBI) in September, which had a market value of $4.7 trillion as on 31 January.
While these inclusions were expected to drive significant FPI inflows, an estimated $25 billion over a period of time, actual investments have so far lagged forecasts, raising questions about whether regulatory barriers or other market factors are holding back capital.
By easing access to both corporate and sovereign debt markets, regulators aim to address these obstacles. But will the latest moves be enough to unlock the anticipated flows?
Regulatory push for FPI flows
On 8 May, the RBI removed short-term investment and concentration limits from its rules governing foreign investments in corporate bonds. Five days later, on 13 May, Sebi proposed streamlining KYC norms and expanding the Fully Accessible Route (FAR), allowing easier access to government securities.
Read this | RBI gives foreigners more flexibility to invest in corporate bonds
Once implemented, these measures would mark a significant easing of restrictions, potentially enhancing foreign investors’ ability to access both corporate and sovereign debt markets.
Foreign investors currently have three routes for investing in Indian bonds: the general route, the voluntary retention route (VRR), and the FAR.
As of 13 May 2025, FPIs have utilized 19.6% of their general investment limit for government bonds and 14.4% of their corporate bond investment limit, according to data from National Securities Depository Ltd (NSDL). This is lower than the utilization levels a year ago, when FPIs had utilized 24.7% of the general limit for sovereign debt and 15.7% of the corporate bond limit as of 13 May 2024.
Meanwhile, around ₹1.75 trillion has been allotted through the VRR, out of the total limit of ₹2.5 trillion.
FAR has emerged as a preferred entry route for foreign investors. Since January 2025, FPIs have net invested ₹45,323 crore through the FAR route, up sharply from the ₹28,962 crore recorded for the entire 2024. This surge underscores its growing importance as a conduit for foreign capital.
According to Mayank Mundhra, FRM- vice-president of risk and head of research at Abans Financial Services Ltd, a financial advisory to FPIs, attracting foreign capital into India’s debt markets has been a policy priority since 2020.
“Currently, we are seeing a shift in debt allocation from developing to developed markets. However, in India’s case, the recent fall in bond yields while global yields are rising indicates some foreign inflows into Indian debt markets,” said Mundhra.
To be sure, the cumulative stock of FPI investments through the FAR route has nearly doubled to ₹2.9 trillion as of 13 May 2025, per NSDL data.
Market challenges persist
Despite regulatory efforts, challenges remain.
The corporate debt market continues to face issues, including limited secondary trading and the dominance of top-rated issuers. High currency hedging costs, often exceeding 4%, and inconsistent tax treatments across investor categories are significant deterrents. Large forex reserves, however, give regulators the confidence to liberalize access.
“This move by both Sebi and RBI seemed to be a part of a broader strategy to deepen the debt market and attract long-term foreign capital for infrastructure and fiscal needs,” said Swatantra Bhatia, partner, Accounting and Outsourcing Services at financial auditing and tax firm Forvis Mazars in India. “It aligns with India’s macro goals like rupee internationalisation, GIFT IFSC development, and reducing reliance on banks for long-term funding.”
Bhatia, however, remains cautious about the Indian debt market’s readiness for large-scale foreign participation. While government bonds are more mature, challenges remain in corporate bond liquidity, infrastructure, and trading depth. Progress is evident but further reforms are needed to support large-scale FPI inflows.
Others noted that regulators and intermediaries have made efforts to standardize and streamline investment processes, increasing market transparency, but more work remains.
“Focus on certainty of outcome and time bound approach to resolution of disputes and recovery is going to be a critical area of focus and interest for foreign investors. We will need to strengthen our judiciary to support this growth,” Meeta Kurpad, partner at law firm Cyril Amarchand Mangaldas.
Some experts view the current regulatory push as preparing for long-term readiness rather than expecting immediate inflows.
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Suresh Darak, founder of financial platform BondBazaar, said it currently does not make sense for FPIs to invest in Indian government bonds on a fully hedged basis, the dollar returns aren’t attractive. Yield differentials between Indian and US 10-year bonds would need to widen for FPIs to see value.
Balancing growth and risk
Regulatory changes also reflect a balancing act between attracting foreign capital and managing associated risks.
In his first public address as chief of Sebi, Tuhin Kanta Pandey emphasized the need for domestic and foreign capital to support India’s growth, saying, “We will be happy to engage with FPIs and AIF industry participants to address their difficulties and further rationalise regulations to promote ease of operation.”
“I would look at it more as a part of the series of reforms, which both RBI and Sebi are trying to bring in, to make sure that doing business in India is easier,” said Madan Sabnavis, chief economist, Bank of Baroda.
Sabnavis noted longstanding concerns about how much FPIs India should allow, centred on potential risks if these investors start withdrawing.
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“The regulators are opening up the market to FPIs. This is in line with the fact that a number of bonds are part of those global indices and a large amount of money were supposed to come, they haven’t really come in the way we had forecasted earlier,” said Sabnavis. “This is to tell foreign investors that if you want to come to India, there should not be any concern of regulatory hurdles.”
