Investment by foreign portfolio investors (FPIs) in Indian government-backed securities has not yet recovered to the levels seen before the announcement of global reciprocal tariffs by the US under President Donald Trump. Despite a temporary 90-day pause in these tariffs, FPI interest remains subdued, indicating ongoing caution among global investors.

As per the Clearing Corporation of India Ltd (CCIL), FPI holdings in Indian government securities stood at ₹2.95 lakh crore as of May 2, 2025, a drop from ₹3.06 lakh crore as recorded on April 2, 2025—just before the Trump administration imposed steep tariff rates on imports from various nations, including India.

Context: Tariffs and Market Reaction

On April 9, President Trump introduced a set of reciprocal tariffs, placing a 26% duty on Indian exports, alongside tariffs on other key trading nations like China, the EU, South Korea, Japan, and Taiwan. However, following international pushback and mounting trade tensions, these tariffs were temporarily paused, excluding China, as part of ongoing negotiations between the US and its trade partners.

The uncertainty triggered a selloff across global and Indian markets, both in equities and fixed-income instruments. Foreign investors pulled out of Indian debt, making April 2025 the worst month for bond outflows since May 2020 and the first major outflow since November 2024. This reversed a strong streak of four consecutive months of FPI inflows into the Indian debt market.

Sluggish Return Despite 90-Day Pause and Trade Talks

Despite the pause in tariff implementation, foreign investors have not rushed back into Indian debt markets. The post-pause inflow has been modest, and investments remain below the levels prior to April’s tariff shock.

This sluggish recovery comes in the backdrop of renewed US-India trade negotiations. On April 29, 2025, the Indian Commerce Ministry stated that both governments are working on a multi-sector bilateral trade agreement (BTA), expected by autumn 2025. The BTA aims to offer mutual benefits and is seen as a potential stabilising factor for cross-border economic flows.

President Trump echoed similar sentiments on the same day, noting that the talks were "going great" and that both sides were close to finalising a deal. Yet, investors appear to be waiting for tangible outcomes before committing substantial capital to Indian debt.

Domestic Demand and RBI Policy Provide Support

While foreign participation remains lukewarm, domestic investors—including EPFO, pension funds, and insurance companies—have helped maintain steady demand for Indian government securities. This demand was further boosted by the Reserve Bank of India’s (RBI) policy actions.

In April 2025, the RBI cut policy rates for the second consecutive time, citing a benign inflation outlook and moderate growth expectations. Accompanying the rate cut was a change in monetary stance from 'neutral' to 'accommodative', signalling continued support for the economy.

As a result, the yield on 10-year benchmark government bonds dropped by around 10 basis points (bps). Lower yields typically make bonds more attractive for domestic investors but less so for global investors seeking higher returns in a risk-adjusted framework.

Structural and Sentiment Barriers for FPIs

There are several reasons why FPI inflows into Indian bonds have not rebounded decisively:

• Lingering geopolitical uncertainties, including the final outcome of the US-India trade negotiations, continue to weigh on sentiment.

• Although tariffs were paused, their potential reinstatement remains a risk.

• Global investors are also factoring in currency volatility, particularly the INR-USD exchange rate, which impacts real returns from Indian assets.

• With the US Federal Reserve maintaining a cautious tone on rate cuts, risk premiums remain high for emerging market debt, including India.

India’s Inclusion in Global Bond Indices

One positive development on the horizon is India’s gradual inclusion in global bond indices, which could unlock billions in passive FPI inflows. However, full integration is still pending due to operational and regulatory hurdles.

Current FPI investments into government securities that are part of the benchmark global bond indices are still well below historical averages, despite this potential.

Trade Talks and Policy Will Be Key Drivers Ahead

For foreign inflows into Indian debt to meaningfully accelerate, a few key developments are crucial:

• Successful conclusion of the India-US bilateral trade deal.

• Stability in global financial conditions, especially around US interest rates.

• Continued accommodative policy by RBI without excessive inflationary pressures.

• Improvements in ease of access for FPIs via regulatory and settlement reforms.

Until then, it appears that foreign investors will continue to tread cautiously, favouring equities or holding cash rather than significantly increasing exposure to Indian government bonds.

Conclusion

The Indian bond market, though resilient due to strong domestic demand, is still navigating the after-effects of global tariff uncertainty and a hesitant FPI community. Despite policy support from the RBI and encouraging trade dialogue with the US, foreign investors have not returned in full force to Indian government securities.

For sustainable FPI participation, clarity on trade policies, macroeconomic stability, and confidence in India’s long-term fiscal trajectory will be essential. In the meantime, domestic institutions are likely to continue anchoring the bond market, while global players wait for more certainty before committing further.

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