FPIs Increase FAR Bond Holdings Amid Policy Adjustments

The Bottom Line

•Foreign investors are heavily buying Indian government bonds following favorable tax policy changes.
•Monitor the RBI's interest rate stance as a key determinant of future foreign debt flows.

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Surge in FAR Bond Investment:

Foreign Portfolio Investors (FPIs) have significantly ramped up investments in Fully Accessible Route (FAR) bonds, recording a net purchase that boosted June inflows to $2.2 billion. This figure marks the highest monthly investment in 15 months, signaling renewed international confidence in Indian rupee-denominated sovereign debt.

Regulatory and Policy Drivers:

The influx follows strategic government initiatives, including the removal of capital gains taxes on specific government bonds and the expansion of eligible security categories. Analysts attribute this shift to a broader sentiment that Indian bonds are primed for inclusion in major global indices, which could attract $20 billion to $30 billion in passive investment over the coming months.

Market Implications:

Despite the positive momentum in debt, foreign investors remain net sellers in the domestic equity market, having offloaded $5.55 billion in shares so far this June. Market participants are closely watching the RBI's guidance on interest rates and potential currency stability measures to gauge if this trend of bond-heavy investment will provide the necessary support to the Indian rupee.

Pulse Intelligence

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Context & Background

In March 2025, FPIs invested $3.34 billion in FAR bonds, marking a previous high point in demand for Indian debt.
The Reserve Bank of India and the central government have introduced temporary schemes to incentivize foreign currency deposits and external commercial borrowings.
Bloomberg Index Services Ltd deferred the inclusion of Indian government bonds earlier this year but signaled a potential update in mid-2026.

Key Consequences

Bond yields are likely to face downward pressure as increased foreign demand drives up prices of sovereign debt.
The Indian government may accelerate further capital market reforms to solidify the country's position in global bond indices.
Foreign equity selling could persist if global macroeconomic uncertainty continues to outweigh the attractiveness of domestic debt markets.

Market & Economic Impact

The bond inflow is supporting government yield targets, though equity selling exerts downward pressure on the Nifty index.