Mumbai: Foreign Portfolio Investors (FPIs) could increase their investments in Indian debt markets, driven by attractive yields and anticipated support from the Reserve Bank of India (RBI). Despite a modest net foreign investment of approximately ₹5,760 crore in November through the Fully Accessible Route (FAR)-eligible bonds, economists remain optimistic about the medium-term prospects.

Factors Driving Potential FPI Inflows

Several factors contribute to the positive outlook for increased FPI participation in Indian debt:

• High Yields: Indian bond yields have remained relatively high, making them attractive compared to other emerging markets. As of December 1, 2025, the yield on India's 10-year G-Sec stood at 6.57%, which is 0.06 percentage points higher than the previous session. This yield is also higher compared to other Asian countries like China, creating a favorable entry point for FPIs.
• RBI Support: The RBI is expected to actively support the bond market through open market operations (OMO) purchases. The central bank recently resumed government bond purchases after a six-month pause, net buying 124.7 billion rupees in the week ending November 7, reinforcing expectations of continued support. Such interventions can help stabilize the market and boost investor confidence.
• Interest Rate Differentials: The interest rate differential between India and other emerging market economies provides leverage for foreign investors.
• Simplified FPI Regulations: The RBI has been proactive in streamlining regulations for FPIs, aiming to attract stable, long-term investment. Measures like the Voluntary Retention Route (VRR) offer FPIs greater operational flexibility and exemptions from certain regulatory provisions, encouraging long-term investments.
• FPI to FDI Reclassification: In November 2024, the RBI introduced a framework allowing FPIs to reclassify their investments as Foreign Direct Investments (FDIs) if they exceed a specific ownership threshold. This provides a stable pathway for continued investment and reduces the need for sudden exits due to regulatory limits.
• Inclusion in Global Indices: Expectations of India's inclusion in global bond indices are also expected to drive inflows.

Recent FPI Activity

Recent data reveals a mixed picture of FPI activity. The latest weekly data shows a modest outflow of INR 8.6 billion from foreign investors in Indian debt, reversing the strong INR 75.6 billion inflow seen in the previous week. Despite this dip, the broader trend remains positive, with eight of the last ten weeks recording net inflows. In November 2025, FPIs withdrew a net ₹3,765 crore from Indian equities, driven by global risk-off sentiment and volatility in global tech stocks. However, they invested ₹8,114 crore in the debt market under the general limit while withdrawing ₹5,053 crore through the voluntary retention route during the same period.

Challenges and Considerations

Despite the positive factors, some challenges could influence FPI flows:

• Global Risk Factors: Uncertainty surrounding the US Federal Reserve's rate-cut trajectory, a firm US dollar, and weak risk appetite across emerging markets could keep foreign investors cautious.
• Geopolitical Tensions: Persistent geopolitical tensions and volatile crude prices could further reinforce a risk-off tone.
• Domestic Factors: Pockets of stretched valuations and subdued industrial indicators could temper investor conviction.

RBI's Role in Attracting FPIs

The RBI has been actively working to create a more favorable environment for FPIs. In 2018, the RBI proposed the Voluntary Retention Route (VRR) to attract more foreign investments. Under this route, FPIs are granted more operational flexibility and exemptions from regulatory provisions such as the cap on short-term investments, concentration limits, and caps on exposure to a corporate group. In September 2025, the RBI introduced new FPI regulations to attract high-quality, stable FPI that supports long-term growth.

Conclusion

While recent FPI activity has shown some volatility, the underlying factors of high yields, anticipated RBI support, and ongoing regulatory reforms suggest a positive outlook for increased FPI flows into Indian debt markets. However, global risk factors and domestic economic conditions will continue to play a crucial role in shaping investor sentiment and influencing investment decisions.