Foreign portfolio investors (FPIs) offloaded government securities (G-Secs) worth Rs 25,544 crore under the Fully Accessible Route (FAR) in the first quarter of FY26, marking the first such quarterly sale since the inclusion of Indian G-Secs in global bond indices.

According to a report by The Hindu Business Line, the sell-off was driven by a combination of geopolitical tensions between India and Pakistan, a shrinking yield spread between Indian and U.S. government bonds, and heightened global risk aversion amid escalating trade tensions involving the United States.

Indian G-Secs were added to the JP Morgan Government Bond Index – Emerging Markets (GBI-EM) on June 28, 2024, and are also set to be included in Bloomberg’s EM Local Currency Government Index beginning January 31, 2025.

These inclusions were expected to boost FPI inflows into Indian debt, but recent developments have tempered that outlook.

Market analysts noted that investment in Indian G-Secs on a fully hedged basis has become less attractive due to the compression in the yield spread between 10-year US Treasuries (UST) and Indian G-Secs. The spread has narrowed from about 400–500 basis points a couple of years ago to around 180 basis points.

“This has primarily happened due to a steep rise in UST yields on account of concerns over the US fiscal deficit, large borrowing and expected huge redemption pressures (10-year UST touched around 4.58 per cent), while Indian bond yields have remained relatively stable thanks to RBI’s monetary policy actions in the recent months and new 10-year government bond is currently trading around 6.20 per cent,” said Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP.

The shift in investment patterns underscores the increasing sensitivity of global investors to interest rate dynamics and geopolitical risks, even amid India's growing integration into global bond markets.