Foreign debt inflows trail expectations despite easier Fully Accessible Route norms

Of the total debt investment, Rs 66,528 crore ($7.5 billion) flowed in through the FAR, while just Rs 12,083 crore was invested in the debt general category so far in 2025, according to NSDL data. There was an outflow of Rs 9,538 crore from debt-VRR. This marks a reversal from 2024, when Rs 1,10,813 crore came via the debt general category and only Rs 28,962 crore came through FAR.

The FAR channel
Under the FAR channel, FPIs and other eligible non-resident investors can freely invest in specified Indian government securities, which offer competitive yields, full repatriation, and fewer restrictions. In October alone, inflows into FAR stood at about Rs 15,144 crore, even as equity markets continued to see net foreign outflows.

The FAR category, as defined by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI), refers to Indian government securities that foreign investors can purchase without investment caps or many restrictions.

The inclusion of government securities (G-secs) in global indices — scheduled to be spread over 10 months, i.e., till March 31, 2025 — was expected to bring nearly $20–25 billion into the country, according to various estimates.

However, it has brought in only $10.7 billion so far — less than half of the anticipated inflows — when figures for 2024 and 2025 are taken into account.

On the other hand, inflows through the debt-general category, which were Rs 110,813 crore in 2024, have remained at just Rs 12,083 crore till October 2025.

In August last year, over a month after Indian Government Bonds (IGBs) were included in the much-awaited JP Morgan emerging markets bond indices, the government and the Reserve Bank of India (RBI) turned cautious and excluded long-term government bonds with 14-year and 30-year tenors from the FAR. The decision was taken amid speculation that unrestricted inflows by FPIs could trigger uncertainties and risks in the future.

Global, domestic factors driving FPIs
A mix of global and domestic factors is driving the FPI move. With stock markets swinging wildly and global cues turning uncertain due to trade tensions and shifting interest-rate expectations, foreign investors are looking for safer, steadier avenues. Indian debt, especially through the FAR window, fits that bill — offering predictable returns, full capital access, and fewer regulatory hurdles. The comfort of steady government bond yields, coupled with India’s resilient economy, moderate inflation, and strong consumption trends, should have made this route a natural magnet for cautious global capital. “But inflows into the debt market were below expectations. The remaining two months of 2025 may not be enough to bring more inflows. Geopolitical issues and FPI withdrawals from the equity market could have played their part,” said an analyst.

Foreign players have pulled out Rs 1.39 lakh crore in 2025 so far. That doesn’t mean FPIs have turned their backs on equities altogether. Their strong participation in recent IPOs shows a more selective, calculated approach, chasing clear growth stories and strong fundamentals rather than spreading bets across the broader market. The contrasting trend of equity outflows and positive debt inflows reflects a strategic rebalancing of portfolios. For many global investors, Indian equities have become a tactical play — used for short-term gains — while Indian debt, with its predictable returns and policy stability, still remains as a long-term anchor in their investment mix.

Domestic strength
For India, the trend carries significant implications. The lukewarm inflows into the debt market and the persistent withdrawals from equities is a warning sign, underscoring that India’s market must rely increasingly on domestic strength. Sustained growth in earnings, steady reforms, and global confidence will determine whether foreign investors return in a meaningful way.

Debt inflows, however, are not guaranteed to last. A sudden flare-up in global inflation or a sharper-than-expected policy shift by the US Federal Reserve could narrow India’s yield advantage and trigger an unwinding of positions.

Yet, for now, the flow of foreign funds into Indian bonds — even amid trade frictions and stock market volatility — shows that global investors still trust India’s macroeconomic story.

Going forward, several factors may turn FPIs into buyers in India. The valuation differential between India and other markets has narrowed, discouraging further FPaI selling and shifting funds elsewhere. Meanwhile, earnings growth in India is gradually picking up and is expected to gather momentum in FY27. “Diwali sales this year across a wide range of goods are at an all-time high, indicating a resilient economy and robust consumption. There are also indications of a potential trade deal between India and the US, which could substantially improve market sentiment,” said an analyst.

These factors could turn FPIs into buyers in the Indian market. However, at higher levels, they may again turn sellers, limiting the possibility of a sustained market rally.