India's bond market is experiencing a significant awakening in 2025, increasingly aligning with global capital flows and attracting greater investor attention. Several factors are contributing to this surge, including policy reforms, attractive yields, and India's robust economic growth.

Increased Foreign Investment

Foreign investment in Indian corporate bonds has surged to a decade high in May 2025, reaching ₹20,996 crore. This inflow was largely driven by a $3.35 billion bond issuance by the Shapoorji Pallonji (SP) group, offering a 19.75% yield compounded annually. Major institutions such as Deutsche Bank, BlackRock, and Morgan Stanley participated in this issuance. Overall, foreign investors have made net purchases of more than INR 1.5 trillion of Indian bonds since the first half of 2023. In the financial year 2024-25 (FY25), foreign investment in corporate bonds has reached ₹12,382 crore, already surpassing the ₹4,511 crore recorded in FY24.

However, June 2025 witnessed a reversal, with foreign investors pulling out ₹25,038 crore from the Indian debt market. This sell-off was triggered by a narrowing gap between US and Indian bond yields, reducing the attractiveness of Indian debt for foreign investors.

Drivers of Growth

Several factors are driving the increased interest in the Indian bond market:

• RBI Policy Reforms: The Reserve Bank of India (RBI) has implemented policy reforms to enhance investment flexibility for Foreign Portfolio Investors (FPIs). The RBI recently scrapped the “short-term investment limit” and “concentration limit” for FPIs in corporate debt securities. These changes are expected to encourage wider participation in the high-yield segment of the Indian debt market.
• Attractive Yields: Indian government bonds (IGBs) offer attractive yields compared to other APAC countries. Even with rate cuts, IGB yields remain competitive, making them appealing to investors. Investment-grade corporate bonds in India offer returns of up to 14% with tenures as short as six months, making them an attractive avenue for both institutional and retail investors.
• Strong Economic Growth: India is projected to remain the fastest-growing economy, with real GDP growth at 5.9% in 2025 and 6.4% in 2026. Despite a predicted global economic slowdown, India is expected to outperform. The Indian economy is expected to grow 6.5% in the 2024/2025 fiscal year ending March 2025.
• Bond Index Inclusion: The inclusion of Indian government bonds in the FTSE government bond index from September 2025 is expected to fuel further inflows. This move will elevate India's global debt market profile and increase accessibility for foreign investors.

Challenges and Considerations

Despite the positive trends, the Indian bond market faces certain challenges:

• Global Economic Uncertainty: Trade tensions and geopolitical uncertainty can lead to volatility in the financial markets, impacting investor sentiment.
• Rupee Volatility: Depreciation of the rupee can erode returns for unhedged investors, potentially triggering outflows.
• Fiscal Dynamics: State borrowings and fiscal deficits could pose challenges.
• Inflation: While inflation has decreased, any resurgence could restrict the RBI's ability to maintain accommodative policies.

Strategies and Outlook

Experts suggest a tactical approach to navigate the Indian bond market in Q3 2025. Short-end yields (5-year bonds) offer better liquidity and lower sensitivity to rate hikes compared to long-dated paper. Investors should prioritize duration compression, focusing on maturities of 3–5 years until Q4 policy clarity. A "wait-and-see" approach until September is recommended, with a focus on buying 3–5-year bonds at yields >6.5% for capital appreciation.

The Indian bond market is poised for growth, driven by policy reforms, strong economic fundamentals, and increasing global integration. While challenges remain, strategic investments and a focus on shorter-duration bonds could yield positive results. The inclusion in global bond indices and the potential for a ratings upgrade further enhance the attractiveness of the Indian bond market. As India progresses towards becoming a $7–8 trillion economy, bonds will play a crucial role in stabilizing portfolios and driving national growth.