FPI debt inflows beat equity selloff in India, June 2026

Debt flows overtake equity outflows in June

Foreign portfolio investors (FPIs) shifted money into India’s debt market in June 2026 even as they continued to cut equity exposure. Market participants linked the rotation to policy measures announced by the Reserve Bank of India (RBI) and the central government to make government securities more attractive to overseas investors. The net result, according to the data cited, was that debt buying broadly matched the month’s equity selling. The mix of tax exemptions, easier access to specific government securities, and expectations around global index inclusion boosted demand for sovereign bonds.

Foreign Institutional Investors (FIIs) were reported to have invested ₹53,363 crore in various debt instruments in June 2026, balancing almost the same amount they divested from equities. Separately, an Economic Times report cited a record ₹39,640 crore pumped into government securities during June. While the exact definitions vary across datasets and channels, the direction was consistent: June saw unusually strong foreign demand for domestic bonds, particularly government securities.

What changed: tax exemptions and a wider Fully Accessible Route

The policy shift was anchored by two key moves. First, the government exempted foreign investors from taxes on interest income and capital gains on specified government securities, a step described as part of a broader package aimed at deepening the bond market. Second, the RBI expanded the Fully Accessible Route (FAR) to cover all new issuances of 15-year, 30-year and 40-year government securities, along with eased investment norms for overseas investors.

The measures announced on June 5 were positioned as an effort to attract foreign capital into sovereign bonds and support market stability. Market participants said that removing withholding tax and easing capital gains treatment improved net returns for overseas buyers. They also noted that a larger pool of FAR-eligible securities made it easier for global investors to deploy size across the yield curve without hitting route constraints.

Why overseas investors warmed to Indian sovereign bonds

Dealers and analysts highlighted a combination of policy and market factors. Domestic bond yields declined during the period, improving mark-to-market potential for buyers entering after the policy changes. At the same time, plunging oil prices and a more stable outlook for currency and rates were cited as supportive for rupee-denominated debt.

Aditya Bagree, India head of markets at Citi, said the removal of withholding tax increased the attractiveness of Indian government bonds. He also pointed to improved macros, lower crude prices, and a steadier currency and rate outlook following RBI measures. Sameer Karyatt, MD and head of trading at DBS Bank, similarly said RBI’s measures alleviated concerns around rupee depreciation, while tax exemptions boosted optimism around possible inclusion in Bloomberg’s global aggregate index.

FAR inflows jump after June 5, NSDL data shows

Data from National Securities Depository Ltd (NSDL) showed that FPIs net bought FAR bonds on all but one day after capital gains taxes on eligible government bonds were done away with and the FAR pool was expanded. The inflow pace was described as a sharp change versus the preceding months.

According to the data cited, debt under the FAR category saw inflows of about $1 billion in the two weeks after June 5, nearly equal to the amount that had come in the previous eight months combined. Net inflows in FAR bonds in June rose to $1.2 billion, described as the highest in 15 months. Another dataset in the report noted that nearly $1.8 billion came through Debt-FAR and $126 million through Debt-VRR (Voluntary Retention Route).

Equity selling continues as risk appetite stays weak

The strong debt bid came alongside persistent equity outflows. The report said global risk aversion and attractive US bond yields continued to weigh on emerging market allocations, with overseas investors remaining net sellers of domestic equities for most of the year. One figure cited net share sales rising to $1.55 billion so far in June, compared with $1.45 billion in May.

Valuations were also flagged as a headwind. Market commentary pointed to lackluster equity returns at high valuations and a weaker rupee as reasons for foreign reluctance toward Indian equities. Analysts described the pattern as tactical de-risking, where global investors keep exposure to India but shift toward government or corporate bonds to reduce volatility.

Currency pressure and the case for “tactical de-risking”

Rupee weakness was presented as a key constraint for dollar-based equity investors. The rupee was cited at approximately 95 against the US dollar, down nearly 6% since the start of 2026 and about 10% over the last year. For overseas investors, currency depreciation can erode equity returns when repatriated, which can make short-term equity positioning harder to justify even if local-market indices hold up.

At the same time, a steadier currency outlook can help debt flows, since bond investors often focus on carry and currency stability. The narrative in June was that RBI and government measures reduced near-term concerns on the rupee while improving post-tax returns on eligible sovereign bonds.

Bond yields soften as foreign buying builds

Foreign fund inflows into government securities coincided with a move lower in benchmark yields. The benchmark 10-year yield softened by about 14 basis points from 6.98% on June 5 to 6.84% later in the month, according to the figures cited. While yields move for multiple reasons, the reported sequence linked the decline to strong foreign demand following the policy changes.

Market participants also noted buying across maturities, from 5-year to over 30-year government securities, supported by a more positive rupee outlook.

Global bond index inclusion: the bigger catalyst investors are watching

A recurring theme in market commentary was the expectation of Indian bonds entering global indices. Participants said the tax exemptions and FAR expansion improved the probability of inclusion in Bloomberg’s global aggregate index. One section of the report added that the removal of long- and short-term capital gains and withholding tax was aimed at supporting inclusion in the Bloomberg Global Aggregate Bond Index.

Economists cited in the report said inclusion could attract $10 billion to $10 billion of passive foreign funds over about 10 months post inclusion. While this is an estimate rather than a confirmed inflow, it helps explain why policy tweaks that remove frictions for index investors can have an outsized impact on near-term positioning.

Key figures at a glance

Why the June shift matters for Indian markets

The June move highlights how quickly foreign flows can respond when policy changes reduce taxes and access constraints. For the government, stronger participation in G-Secs can support bond market depth and potentially help funding conditions, especially if the investor base broadens beyond domestic institutions. For markets, the combination of better post-tax returns and a larger FAR universe directly affects how index and real-money accounts allocate to India.

But the contrast with equity flows also underlines that foreign investors are separating macro and valuation views across asset classes. The same month that drew record bond inflows still saw heavy equity selling, with global risk aversion, high US yields, and currency considerations shaping the trade.

Conclusion

FPIs returned aggressively to India’s debt market in June 2026 as tax concessions, the FAR expansion to longer tenors, and eased norms improved the investment case for government securities. The next key trigger for sustained inflows, as cited by market participants, remains progress on potential inclusion of Indian bonds in Bloomberg’s global aggregate index and other global bond indices.