Foreign investors are returning to Indian government bonds in a big way. In August, inflows through the fully accessible route rose sharply to ₹9,690 crore, the strongest level seen in five months. This turnaround comes after two difficult months earlier in the year when global uncertainties and profit booking had triggered heavy outflows.

The renewed interest is being driven by India’s attractive yield spreads compared to US Treasury bonds. The current ten year benchmark Indian bond is trading at 6.56 percent, while a US Treasury of the same tenure offers only 4.23 percent. This spread of 233 basis points gives foreign investors a comfortable cushion, making Indian sovereign debt more appealing. In August alone, yields rose by 23 basis points, enhancing returns further for global investors seeking higher income.

Experts say that this surge reflects more than just yield advantages. India’s improving fiscal position and steady progress on consolidation are adding confidence. Falling inflation has also reassured global markets that India remains a relatively stable economy at a time when several other emerging markets are struggling with currency volatility, political risk, and weaker growth. Global funds are increasingly diversifying away from China and channeling allocations toward India’s debt market.

The upcoming inclusion of Indian government bonds in the FTSE Russell index from September is another factor supporting flows. While the impact may be modest due to the smaller size of the index, it signals growing global recognition of India’s debt market. Analysts also note that the recent credit rating upgrade by S&P has strengthened India’s credibility in the eyes of foreign institutional investors, further lowering the perception of risk.

Still, risks remain. Global uncertainties continue to hover over capital markets, and currency volatility could affect investor sentiment. While the current momentum is encouraging, experts believe sustained inflows will depend on how global economic conditions evolve and whether India can maintain its fiscal discipline and growth trajectory.

For now, August has given Indian debt markets a much needed boost, signaling that global investors are willing to bet on India’s resilience even in uncertain times.

 

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