FPIs End Five-Month Buying Streak, Sell ₹9.2K Crore FAR Bonds in September

Foreign Investors Shift Gears: September Sees ₹9,192 Crore Sell-off in FAR Bonds

The recent sell-off by foreign investors signals a significant shift in sentiment towards Indian government securities amid rising global uncertainties.

End of a Buying Streak

The recent sell-off by FPIs comes after a robust five-month period where they net purchased ₹60,332 crore in FAR bonds from April to August. The buying spree peaked in June, with FPIs acquiring a record ₹41,774 crore, spurred by favorable tax reforms and the inclusion of more securities in the FAR category. However, August saw a significant slowdown, with only ₹203 crore in net purchases, indicating a shift in investor sentiment.

Geopolitical Tensions and Market Sentiment

The reversal in FPI sentiment coincides with a broader deterioration in global risk appetite. Brent crude prices have surged above $105 per barrel, raising concerns over inflation and India’s import costs. Coupled with rising US bond yields and uncertainty in the global economic outlook, these factors have put additional pressure on emerging-market assets, including Indian government securities.

Market analysts suggest that while recent tax changes aimed at improving the attractiveness of Indian bonds have had some positive impact, they are insufficient to counteract the prevailing global risk-off sentiment. “The recent selling reflects a broader shift in global risk appetite, with higher crude oil prices, firm US yields, and renewed geopolitical uncertainty weighing on emerging-market debt,” noted a treasury head at a private bank.

Impact of Tax Reforms and Index Inclusion

The Indian government’s decision to exempt foreign investors from tax on interest income and capital gains from government securities, effective from April 1, 2026, was a significant factor driving earlier inflows. Additionally, the Reserve Bank of India (RBI) expanded the FAR basket to include newly issued long-term government securities, further enhancing the appeal of Indian bonds.

However, the anticipated inclusion of Indian Gsecs in the Bloomberg Global Aggregate Index, which could have provided a substantial boost to demand, has been deferred. Bloomberg Index Services Limited (BISL) announced on July 31 that more time was needed for recent market reforms to be fully integrated into daily market practices. This uncertainty has contributed to the waning optimism among foreign investors.

Key Highlights

• FPIs sold ₹9,192 crore in FAR bonds in September, ending a five-month buying streak.
• The sell-off marks the first monthly outflow since March 2023.
• Geopolitical tensions and rising crude oil prices are impacting demand for Indian debt.
• Tax reforms and expanded FAR categories initially boosted foreign interest in Indian bonds.
• Deferred inclusion in the Bloomberg Global Aggregate Index has dampened investor sentiment.

Investor Note: The recent shift in FPI sentiment highlights the fragility of investor confidence in Indian government securities amid global uncertainties. Investors should closely monitor geopolitical developments and crude oil prices, as these factors could significantly influence future inflows into the Indian debt market.