Foreign portfolio investors have been reducing their exposure to Indian equities throughout 2026, even as they aggressively increase investments in government bonds. Market experts attribute this shift to expectations that Indian sovereign bonds will soon be included in the Bloomberg Global Aggregate Bond Index, a move that could unlock billions of dollars in passive foreign investments over the coming years.

The change in sentiment comes despite the broader weakness in Indian equities, with overseas investors preferring the relative stability and long-term returns offered by government securities.

Tax Reforms Have Strengthened India’s Case

India recently removed taxes applicable to foreign investors purchasing government bonds, a policy change widely viewed as a major step toward qualifying for inclusion in Bloomberg’s flagship global bond index.

While Bloomberg is expected to provide an update on the inclusion process shortly, market participants anticipate the actual entry to take place in early 2027.
According to Ashish Vaidya, Head of Treasury at DBS Bank, India could receive a weighting of roughly 0.7% in the index, potentially attracting $25-27 billion in foreign capital by the end of FY2028.

Bond Inflows Surge As Investors Position Early

Data from the National Securities Depository Limited (NSDL) shows foreign investors have already purchased approximately $7.7 billion worth of Indian debt in 2026, exceeding the total inflows recorded during all of 2025.

The momentum accelerated in June alone, when foreign investors invested around $5.8 billion after the government abolished the 12.5% long-term capital gains tax and the 20% withholding tax on interest earned from government bonds.
At the same time, overseas investors have sold nearly $27.6 billion worth of Indian equities this year as global investors increasingly chased AI-driven opportunities in international markets.

Longer-Term Bonds Could Attract Global Pension Funds

The government has also expanded the list of securities available under the Fully Accessible Route (FAR) by adding government bonds with maturities of 15, 30 and 40 years.

Since FAR securities have no foreign investment limits, the move is expected to appeal to international pension funds and insurance companies that typically invest in longer-duration assets.

June recorded nearly $2.3 billion in foreign inflows through the FAR route, marking the strongest monthly inflow seen in the past fourteen months.
HSBC believes the broader range of long-tenure bonds should increase participation from institutional investors seeking long-term fixed-income exposure.

Experts See Tax Changes As A Turning Point

Market participants describe the government’s tax reforms as one of the biggest catalysts behind the renewed interest in Indian debt.

Tanveer Sethi, Senior Executive Vice President of Investment Management at Kotak Mahindra Asset Management Singapore, called the tax exemption a “game changer,” saying the reforms naturally improve India’s chances of securing Bloomberg index inclusion.

He added that many of the current buyers are active investors positioning themselves ahead of the expected inclusion. Once India officially joins the index, a significant portion of these holdings is likely to shift into passive investment funds that track the benchmark.

Bond Inflows Could Provide Relief To The Rupee

The inflows into government bonds could also help ease pressure on India’s external finances.

Persistent equity outflows, combined with elevated crude oil prices, have widened India’s balance of payments deficit and weighed on the rupee. The deficit expanded to $23.6 billion during the financial year ending March 2026, compared with $5 billion a year earlier. During April and May alone, the shortfall reached $11 billion, driven by continued capital outflows and rising energy costs.

Analysts believe sustained bond inflows could help narrow the deficit while providing additional support to the domestic currency.

Gaura Sengupta, Chief Economist at IDFC First Bank, noted that India’s inclusion in the JPMorgan Government Bond Index-Emerging Markets in 2024 had already attracted nearly $20 billion in foreign investments.

However, she pointed out that Bloomberg’s index includes both developed and emerging markets, making competition for investor attention stronger. She added that removing taxes for overseas bond investors significantly reduces compliance burdens and improves the ease of investing in Indian debt.

Bloomberg Is Preparing For India’s Entry

Bloomberg has also begun strengthening market infrastructure ahead of the anticipated inclusion. The company recently introduced an electronic trading workflow for Indian government bonds through the Bloomberg Terminal, allowing foreign portfolio investors to access liquidity from both domestic and international banks more efficiently.

The development is seen as another important milestone in integrating India’s government bond market with global fixed-income markets.

Why Are Foreign Investors Pulling Back From Indian Equities?

The sharp contrast between foreign investment in bonds and equities reflects a broader shift in global capital allocation rather than weakening confidence in India’s economy. While India’s long-term growth story remains intact, foreign portfolio investors have increasingly redirected funds towards developed markets, particularly the United States, where artificial intelligence-driven technology stocks have generated exceptional returns.

Another factor weighing on Indian equities is valuation. After several years of strong gains, many Indian stocks continue to trade at premium valuations compared with other emerging markets. Combined with a moderation in corporate earnings growth and uncertainty surrounding global crude oil prices, overseas investors have opted to trim their exposure.

As a result, foreign investors have sold approximately $27.6 billion worth of Indian equities so far in 2026. However, sustained buying by domestic mutual funds, insurance companies and retail investors through systematic investment plans (SIPs) has helped cushion the impact, preventing a sharper correction in benchmark indices.

Bonds Are Emerging As The Preferred Bet

Unlike equities, Indian government bonds currently offer a compelling mix of relatively attractive yields, lower risk and improving market accessibility. Recent tax reforms have reduced the cost of investing for overseas institutions, while the expected inclusion in Bloomberg’s Global Aggregate Bond Index has created the prospect of billions of dollars in passive inflows over the next few years.

For global pension funds, insurance companies and sovereign wealth funds, government securities also provide predictable returns backed by the sovereign, making them particularly attractive during periods of heightened market volatility.

This divergence shows how foreign investors are approaching India differently across asset classes. While equity investments remain sensitive to corporate earnings, valuations and global market sentiment, government bonds are increasingly benefiting from structural policy reforms and greater integration with international financial markets.

The Last Bit,

India’s capital markets are witnessing an unusual divergence. While foreign investors continue to pare their exposure to equities amid global competition for capital and concerns over valuations, they are simultaneously increasing investments in government bonds, encouraged by tax reforms and the prospect of Bloomberg Global Aggregate Bond Index inclusion.

If the index inclusion proceeds as expected in 2027, it could mark a defining moment for India’s fixed-income market, bringing billions of dollars in long-term foreign capital.

At the same time, the resilience of domestic investors will remain crucial in supporting equity markets until overseas sentiment improves. Together, these trends underline an important shift in how global investors are choosing to participate in India’s growth story – moving beyond stocks to increasingly embrace the country’s debt market.