Foreign Capital Floods Into Indian Government Bonds, Year-to-Date Purchases Surpass Last Year's Total
Taylor Wilson
Foreign investors have net-purchased $7.7 billion in Indian government bonds this year, surpassing 2025's full-year total — while net-selling $27.6 billion in Indian equities. The trigger: India last month scrapped two taxes on overseas bond investors.
Why did money suddenly flood into Indian bonds?
India last month eliminated the 12.5% long-term capital-gains tax and the 20% withholding tax on interest for foreign bond investors, slashing the cost of entry.
In June alone, net foreign inflows hit $5.8 billion.
This means → two toll gates that used to sit between foreign capital and Indian debt are now gone; money moved immediately.
Tanveer Sethi, senior EVP at Kotak Mahindra Asset Management (Singapore), called the tax overhaul "truly a game changer."
Bloomberg index inclusion — how big is the next wave?
The Bloomberg Global Aggregate Bond Index — a benchmark tracking major government and corporate bonds worldwide — is expected to add Indian sovereign debt around early 2027, giving India a weight of roughly 0.7%.
Ashish Vaidya, head of treasury at DBS Bank, estimates this could channel $25–27 billion into India by FY2028.
In plain terms = once Indian bonds enter this index, trillions of dollars in passive funds worldwide must buy them automatically, proportional to the weight — that is the real flood.
Bloomberg last week launched an electronic trading workflow for foreign portfolio investors, connecting them to liquidity from international and local Indian banks via the terminal — groundwork for formal inclusion.
What does the "Fully Accessible Route" unlock?
India added 15-year, 30-year, and 40-year government bonds to the FAR — a channel that removes foreign-investment caps — opening the door to long-dated maturities.
June inflows through the FAR hit $2.3 billion, the highest in nearly 14 months.
This means → foreign investors were previously confined mostly to shorter-dated debt; now long bonds have no cap either — which matches the "long-duration demand" of overseas insurers and pension funds.
Equities are bleeding out — why do bonds matter?
Foreign investors have net-sold $27.6 billion in Indian stocks this year. Combined with rising oil prices that push up import costs, India's current-account deficit widened to $23.6 billion in the fiscal year ending March 2026, up from just $5 billion the year before.
The April–May deficit alone reached $11 billion, pressuring the rupee.
Put simply = stock money is leaving, oil bills are rising — India's foreign-exchange ledger is leaking on both ends. Bond inflows are plugging that gap and propping up the rupee.
Can this inflow wave last?
After India's inclusion in the J.P. Morgan GBI-EM index in 2024, net bond inflows totalled $20 billion — proof that index inclusion delivers real capital.
Gaura Sengupta, chief economist at IDFC First Bank, notes that Bloomberg's index covers both emerging and developed markets, so Indian bonds must compete in a broader field; the tax overhaul cuts compliance costs and improves competitiveness.
This reflects a phased dynamic: current inflows are largely tactical investors and a handful of active managers positioning early. Once inclusion is confirmed, passive funds will gradually take over — the final confirmation date and weight are the key checkpoints for whether this inflow wave can keep building.
Content is for reference only, not financial advice.