FPIs Invest Rs 7,759 Crore in FAR G-Secs in November as Rupee, Bond Rally Revive Demand

foreign portfolio investors (FPIs) have renewed their interest in Indian government securities, investing Rs 7,759 crore in bonds under the Fully Accessible Route (FAR) during the first nine days of November. The inflows mark a reversal from the withdrawals recorded in September and October, when overseas investors pulled out a combined Rs 17,417 crore from these securities.

The return of foreign investors has been supported by a combination of factors, including a stronger rupee, falling government bond yields, softer crude oil prices and easing US Treasury yields. These developments have improved the relative appeal of Indian debt and strengthened expectations of better returns for overseas investors.

The renewed interest in government securities has also coincided with a return of foreign buying in Indian equities, suggesting an improvement in broader foreign investor sentiment towards domestic Financial Markets.

Key Highlights

• FPIs invested Rs 7,759 crore in FAR government securities during the first nine days of November.
• Foreign investors withdrew Rs 17,417 crore from FAR bonds in September and October combined.
• The benchmark 10-year government bond yield declined 22 basis points during the first week of November.
• The rupee appreciated 1.1% during the week, improving the currency outlook for overseas investors.
• FPIs purchased Indian equities worth Rs 48,263 crore over five consecutive trading sessions between November 2 and 6.

Why Are Foreign Investors Returning to Indian Government Bonds?

The improvement in foreign investor demand reflects a more favourable combination of bond yields and currency conditions. When government bond yields decline, existing bond prices generally rise, creating the possibility of capital gains for investors holding those securities.

At the same time, a stable or appreciating rupee can improve returns for overseas investors when their investments are converted back into dollars. Currency movements are particularly important because foreign investors measure their overall returns in their own currencies, not only in rupee terms.

Gaura Sengupta, chief economist at IDFC First Bank, said the widening of the yield differential between Indian government securities and US Treasuries had supported inflows. She also pointed to stability in the USD-INR exchange rate as another factor encouraging Foreign Investment.

The combination of a relatively attractive yield premium and improved currency stability has helped revive interest in Indian government debt after two months of significant withdrawals.

FPI Outflows in September and October Reversed

Before the November recovery, foreign investors had reduced their exposure to Indian government securities under the Fully Accessible Route.

According to data from the National Securities Depository Limited (NSDL), FPIs withdrew Rs 10,431 crore from FAR securities in September and another Rs 6,986 crore in October. The combined outflow during the two months reached Rs 17,417 crore.

Several factors had weakened investor appetite during that period. These included uncertainty surrounding India’s potential inclusion in the Bloomberg Global Aggregate Index, elevated US Treasury yields, higher crude oil prices and concerns about rupee depreciation.

These developments increased uncertainty over the returns foreign investors could earn from Indian bonds. The latest improvement in market conditions has helped reverse part of that cautious sentiment.

Foreign Investors Also Return to Indian Equities

The recovery in foreign investment has not been limited to government securities. FPIs also turned net buyers in the Indian equity market during the first week of November.

According to provisional exchange data reported by CNBC-TV18, foreign investors purchased shares worth Rs 48,263 crore over five consecutive trading sessions between November 2 and November 6.

They remained net buyers in each of the five sessions, with purchases accelerating towards the end of the week. FPIs bought shares worth Rs 13,750 crore on November 6 and Rs 16,278 crore on November 5.

The buying followed substantial equity outflows in the preceding months. Foreign investors had withdrawn Rs 34,843 crore from Indian equities in October and Rs 35,861 crore in September.

The return of buying interest across both debt and equity markets indicates an improvement in foreign investor sentiment. However, the sustainability of these inflows will depend on domestic market conditions, global interest rates and currency movements.

Sharp Government Bond Rally Improves Investor Sentiment

A strong rally in Indian government bonds during the first week of November was another important factor behind the renewed foreign interest.

The benchmark 10-year government security yield declined by 22 basis points during the week, reaching 7.1898% on November 6. It was the steepest weekly decline since October 2019.

The rally followed a nine-basis-point fall on November 2, when the benchmark yield closed at 7.32%, compared with 7.41% on the previous trading day.

On Monday, the 10-year G-Sec yield was trading at around 7.20%, compared with its previous close of 7.19%, according to the supplied market update.

Bond yields and prices generally move in opposite directions. When yields fall, existing bonds with higher fixed coupon payments become more valuable in the market. Investors who purchased these securities before the decline in yields can potentially benefit from price appreciation.

The sharp movement in yields therefore improved the investment outlook for participants who had entered the Indian government Bond Market at earlier, higher yield levels.

Lower Crude Oil Prices and Rupee Appreciation Support Bond Demand

Lower crude oil prices played an important role in improving sentiment towards Indian financial assets. India imports a substantial share of its crude oil requirements, making international oil prices an important factor for its import bill and inflation outlook.

Brent crude prices declined around 17% during the week following the US midterm election results. The fall eased concerns about India’s energy import costs and potential inflationary pressure.

Market participants also pointed to expectations of progress in negotiations between the United States and Iran as a factor supporting the decline in oil prices.

The rupee appreciated approximately 1.1% during the same week. A stronger domestic currency can improve dollar-denominated returns for foreign investors holding Indian assets, particularly when they are concerned about exchange-rate losses.

A dealer at a public sector bank had earlier attributed the decline in bond yields mainly to falling crude oil prices and short covering. Short covering occurs when traders who previously sold securities or placed bets on falling prices buy them back, potentially adding to upward price pressure.

US Treasury Yields and Currency Stability Remain Key

Developments in the US bond market also influenced the relative attractiveness of Indian government securities. The US 10-year Treasury yield declined by around 10 basis points during the week to approximately 4.8%.

Indian benchmark bond yields fell more sharply, declining 22 basis points to 7.1898% on November 6. This left the nominal yield differential between Indian government securities and US Treasuries at around 240 basis points towards the end of the week, compared with approximately 250 basis points earlier.

The yield differential represents the difference between the interest rates offered by government bonds in the two countries. A relatively higher Indian yield can attract overseas investors seeking additional returns, although it does not automatically translate into higher realised profits.

Foreign investors must also account for currency movements, hedging expenses and the possibility of rupee depreciation. Even when Indian bonds offer a higher nominal yield, exchange-rate losses can reduce or eliminate the additional return when investments are converted into dollars.

Market participants have therefore emphasised that currency stability is as important as the yield premium when overseas investors evaluate Indian debt.

Why Currency Hedging Costs Matter for Foreign Investors

Currency hedging allows foreign investors to reduce the risk of losses caused by exchange-rate movements. However, hedging comes with costs that can affect the overall returns from an investment.

If the cost of protecting against rupee depreciation rises, the effective return on Indian government securities may become less attractive, even when their nominal yields remain higher than those of US Treasuries.

A head of treasury at a private sector bank said currency stability plays an important role in attracting debt inflows. The yield differential alone may not be sufficient if investors remain concerned about exchange-rate movements.

This means that sustained foreign investment will depend not only on India’s interest-rate advantage but also on confidence in the rupee and the broader macroeconomic outlook.

What Is the Fully Accessible Route for Foreign Investors?

The Fully Accessible Route is a framework that allows eligible foreign portfolio investors to invest in specified Indian government securities without the investment limits that apply under the general foreign investment route.

The framework is intended to make India’s government bond market more accessible to overseas investors and support the country’s integration with global fixed-income markets.

Foreign investment through FAR can help broaden the investor base for government securities and potentially improve demand for Indian debt. However, overseas investors continue to assess interest-rate movements, currency risks, liquidity and global economic conditions before committing capital.

Will FPI Inflows Continue in November?

The November inflows represent a notable change from the withdrawals recorded in September and October. However, it is too early to conclude that foreign buying will remain consistently strong throughout the month.

Several factors will influence the direction of future investment. These include movements in US Treasury yields, crude oil prices, the USD-INR exchange rate and the relative return available from Indian government securities.

Any renewed depreciation in the rupee or increase in US bond yields could reduce the attractiveness of Indian debt. Similarly, higher crude oil prices could revive concerns about India’s import bill and inflation outlook.

On the other hand, continued currency stability, a favourable yield differential and lower global borrowing costs could support further foreign interest in Indian bonds.

Conclusion

FPIs invested Rs 7,759 crore in Indian government securities under the Fully Accessible Route during the first nine days of November, reversing the outflow trend of the previous two months. The improvement coincided with a sharp rally in government bonds, a stronger rupee and falling crude oil prices.

Foreign investors also returned to Indian equities, purchasing shares worth Rs 48,263 crore over five consecutive trading sessions between November 2 and 6. Together, these developments point to an improvement in foreign investor sentiment towards Indian financial markets.

However, the sustainability of the recovery will depend on global interest-rate movements, currency stability and the relative attractiveness of Indian bond yields. For overseas investors, the combination of yield advantage and manageable exchange-rate risk will remain central to investment decisions.