FPIs Pull Our Rs 2,766 Crore From Indian Debt Market Post RBI Rate Cut

Foreign investors have pulled out around Rs. 2,766 crore net from Indian bonds that are part of global bond indices, since the 50 basis point rate cut by RBI on June 6th.

Narrowing Spread Deters Foreign Participation

The yield spread between Indian and US bonds currently stands at just 187 basis points, one of the lowest in recent times. Historically, such a narrowing discourages foreign investment in emerging markets, as the reduced differential offers lower risk-adjusted returns once currency and compliance costs are factored in.

Drop in Holdings Across Key Bond Series

According to the Clearing Corporation of India (CCIL), foreign investments in the Fully Accessible Route (FAR) stood at ₹2.76 lakh crore as of June 11, down from ₹2.78 lakh crore on June 6. A major decline was noted in two benchmark government securities:

• 7.38% 2027 bonds: Foreign holding dropped to 11.47% from 12.80%
• 7.06% 2028 bonds: Holdings reduced to 15.20% from 15.45%

RBI’s Growth-Focused Stance

The most recent 50 basis point drop was the third in a row, following two prior cuts of 25 basis points each in February and April 2025. The central bank’s move is in line with the government’s recent announcement of GDP numbers for FY25, and it is meant to boost growth.

Sanjay Malhotra, the governor of the Reserve Bank of India (RBI), also said that the Cash Reserve Ratio (CRR) would be decreased by 100 basis points in four equal parts, starting in September 2025. This should keep the system’s extra cash flow going, which might keep bond yields low all year.

Outlook

The persistence of narrow spreads between Indian and US bonds could lead to further outflows from the Indian bond market, especially from securities included in global bond indices. Investors are likely to continue seeking higher returns in more stable, developed markets unless yield differentials widen again.

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