Overseas investors lift Indian bond buying as stock outflows mount

Foreign investors have put $7.7 billion into Indian debt so far in 2026, already exceeding the $6.6 billion received across all of 2025, according to data from Indian depository NSDL. Over the same period, they have sold $27.6 billion of Indian equities, underscoring a shift in overseas flows as policy changes improve access to the government bond market.

The buying has accelerated after India removed two tax costs for offshore buyers of government securities: a 12.5% long-term capital gains tax and a 20% withholding tax on interest income. NSDL data show $5.8 billion of this year's debt inflows came in June, the month after the changes were made.

The reforms are tied to India’s effort to secure entry into the Bloomberg Global Aggregate Bond Index. An update is expected soon, while actual inclusion is expected in early 2027, according to market participants cited by CNBC.

Index flows and market access

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 inclusion could generate $25 billion to $27 billion of inflows by the 2028 financial year.

Bond index inclusion can affect capital flows because funds that track the benchmark must buy securities in line with the country’s assigned weight. Active managers may also buy ahead of a formal entry if they expect benchmark-driven demand later. Tanveer Sethi, senior executive vice president for investment management at Kotak Mahindra Asset Management Singapore, told CNBC that current purchases include tactical investors and some active funds positioning before inclusion. He said some of those holdings could later transfer to passive investors after the benchmark change.

India has also widened the set of government securities available under the fully accessible route, which allows foreign portfolio investors to buy specified bonds without investment caps. Securities with maturities of 15, 30 and 40 years have been added. In June, fully accessible route bonds drew $2.3 billion of foreign inflows, the strongest monthly figure in 14 months.

HSBC said in a note last month that adding longer-maturity bonds could attract foreign insurers and pension funds, which often need assets with longer duration to match long-term liabilities.

Rupee and balance-of-payments effects

The turn toward bonds comes as equity withdrawals and a higher import bill linked to global oil prices have put pressure on India’s external accounts and currency. The Reserve Bank of India reported that the balance-of-payments deficit widened to $23.6 billion in the financial year ended March 2026, from $5 billion a year earlier. RBI data also showed an $11 billion deficit for April and May, reflecting continued capital outflows and energy price shocks.

Bond inflows can help narrow that funding gap by bringing foreign exchange into the country, which may support the rupee. Gaura Sengupta, chief economist at IDFC First Bank, told CNBC that India’s 2024 entry into the JPMorgan Government Bond Index-Emerging Markets brought net inflows of as much as $20 billion.

Sengupta said the Bloomberg benchmark differs because it includes both developed and emerging markets, requiring Indian bonds to compete for attention across a wider set of sovereign issuers. She added that removing tax for overseas bond investors lowers compliance costs and improves ease of doing business.

Bloomberg has also introduced an electronic trading workflow for Indian government bonds. According to Bloomberg, the system allows foreign portfolio investors using the Bloomberg Terminal to access liquidity from international and domestic banks.

This story draws on original reporting from CNBC.