Foreign investors rotate into Indian bonds as stock outflows build

Foreign money is moving into Indian government bonds even as overseas investors pull cash from Indian stocks. For retail investors watching India exposure through funds or ETFs, the shift matters because bond inflows can support the rupee and change how global portfolios hold Indian assets.

Foreign investors have bought $7.7 billion of Indian debt so far in 2026, topping the $6.6 billion of inflows for all of 2025, according to data from Indian depository NSDL cited by CNBC. Over the same period, they have sold $27.6 billion of direct equities, CNBC reported.

The bond demand is tied partly to India’s push to enter the Bloomberg Global Aggregate Bond Index, a major global benchmark for bonds. An index is a basket used by fund managers to track a market. If Indian government bonds are added, funds that follow that benchmark may need to buy them to match the index.

India removed taxes for overseas bond investors last month, CNBC reported, a move experts said cleared a key obstacle to potential inclusion. The update is expected soon, while actual entry into the index is expected in early 2027, according to CNBC.

Why the tax change matters

India cut the 12.5% long-term capital gains tax and the 20% withholding tax on interest income for foreign investors buying government bonds, CNBC reported. After that move, $5.8 billion of this year’s debt inflows arrived in June alone, according to NSDL data cited by CNBC.

Ashish Vaidya, head of treasury at DBS Bank, told CNBC’s “Inside India” that India could receive a weighting of about 0.7% in the Bloomberg index. He estimated that the move could bring $25 billion to $27 billion of inflows by financial year 2028.

India has also expanded the group of government securities available through the “fully accessible route,” a channel that lets foreign investors buy without investment caps. The country added 15-year, 30-year and 40-year government bonds to that route, CNBC reported.

That change could appeal to foreign insurers and pension funds, which often need longer-dated bonds to match long-term obligations, HSBC said in a note cited by CNBC. In June, bonds under the fully accessible route drew $2.3 billion of foreign inflows, the strongest monthly total in 14 months, CNBC reported.

Stocks face a different mood

The turn toward bonds comes as Indian equities lose some foreign investor interest. CNBC attributed the stock outflows partly to global market momentum around artificial intelligence, which has drawn attention elsewhere.

Tanveer Sethi, senior executive vice president of investment management at Kotak Mahindra Asset Management Singapore, told CNBC that the tax exemption was a major development for overseas buyers of Indian government bonds. He said some current inflows are coming from tactical investors and active managers positioning before a potential index inclusion.

After inclusion, some of those holdings may move from tactical investors to passive investors, experts told CNBC. Passive investors are funds that track an index rather than selecting securities one by one.

Rupee pressure is part of the story

The bond inflows could also help India’s currency position. Equity outflows and a higher import bill linked to rising global oil prices have put pressure on government finances and the rupee, CNBC reported.

India’s balance of payments deficit widened to $23.6 billion in the financial year ended March 2026, from $5 billion a year earlier, according to Reserve Bank of India data cited by CNBC. The deficit was $11 billion across April and May, with CNBC citing continued capital outflows and energy price shocks.

Gaura Sengupta, chief economist at IDFC First Bank, told CNBC that India’s 2024 addition to JPMorgan’s Government Bond Index-Emerging Markets brought net inflows of up to $20 billion. She said the Bloomberg index is different because it includes both developed and emerging markets, meaning Indian bonds will compete in a broader pool.

Bloomberg has also introduced an electronic trading workflow for Indian government bonds, saying it gives foreign portfolio investors access to liquidity from international and domestic banks through the Bloomberg Terminal.

This story draws on original reporting from CNBC.