Foreign Investors Prefer Indian Bonds As Equity Sentiment Remains Weak

Foreign portfolio investors (FPIs) continued to favour Indian debt over equities in June, even as early signs of buying emerged in the stock market at the start of July. Overseas investors poured a record ₹41,773 crore into government securities under the Fully Accessible Route (FAR) in June, while pulling out ₹49,340 crore from Indian equities during the same month. Even so, the mood showed early signs of changing in July. FPIs bought Indian equities worth ₹708 crore during the first three trading sessions of the month, marking a shift after heavy selling in June.

Despite that, the broader market has had a difficult year. The Nifty 50 is down more than 8% in 2026, while the Nifty IT index has dropped nearly 30% as foreign investors stayed on the sidelines amid concerns over corporate earnings and global uncertainties.

On a year-to-date basis, FPIs have withdrawn ₹2.73 lakh crore from equities, while debt markets have attracted net inflows of ₹51,178 crore.

Why Are Foreign Investors Preferring Debt?

Analysts say a combination of policy support and improving currency stability has made Indian government bonds more attractive. The government recently exempted capital gains tax and interest income on eligible foreign investments while expanding the range of securities available under the FAR route.

Hopes have also grown that Indian government bonds may find a place in Bloomberg's Global Aggregate Bond Index. If that happens, funds tracking the index would have to buy eligible Indian bonds, potentially bringing in fresh overseas money.

The recent recovery in the rupee has added to that optimism. After touching 96.96 against the US dollar in late May, the currency strengthened to 95.21 by 3 July. With the rupee showing signs of stability, debt investments have become less risky for foreign investors.

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Can Equity Buying Continue?

The return of FPI buying in July has offered some relief, but analysts are not reading too much into three days of inflows. Many believe overseas investors are waiting for the April-June earnings season before taking bigger bets on Indian stocks.

According to economists, the impact of the recent West Asia conflict on corporate earnings and any change in the US Federal Reserve's interest rate outlook could influence future investment decisions.

Apart from FAR investments, FPIs also invested ₹30,620 crore under the General Limit and ₹3,246 crore through the Voluntary Retention Route in June. Overall, foreign investors recorded a net inflow of around ₹4,669 crore across all market segments during the month, ending a three-month streak of overall outflows.