Foreign portfolio investment (FPI) debt inflows have accounted for 62 per cent of cumulative equity inflows into India since FY 1998-99, marking the growing importance of the country's debt market in attracting foreign capital, according to a report by DSP Mutual Fund.
Key Highlights of FPI Debt Inflows
India has received $95.5 billion in FPI debt inflows over approximately 28 years, compared with $154.4 billion in equity inflows. The report highlighted that debt inflows have gained momentum following India's inclusion in global bond indices and the introduction of the Fully Accessible Route (FAR) for government securities.
Since FY25, India has attracted around $19.3 billion in FPI debt inflows, of which $11.8 billion came through the FAR route. DSP Mutual Fund stated that India is well-positioned to attract further debt inflows, with real government security yields currently above 2 per cent and the country's broad real effective exchange rate (REER) below 90.
Historical Preferences of Foreign Investors
The report added that foreign investors have historically preferred markets offering positive real yields, stable currency expectations, and easier market access. DSP Mutual Fund also noted that the removal of capital gains tax could improve access further, making FAR a quasi-open, tax-efficient window for global investors.
At a time of weak equity FPI flows and foreign direct investment (FDI) outflows, debt flows can help bridge the current account deficit and reduce pressure on the rupee, according to the report. It emphasized that debt inflows could support India's external sector, especially when equity FPI flows remain weak and FDI outflows have strained the capital account.
Broader Economic Implications
Debt inflows are seen as a stabilizing force for India's economy. By bridging the current account deficit and reducing rupee pressure, they provide a cushion against external shocks. The report underscores the strategic importance of the FAR route and global bond index inclusion in enhancing India's attractiveness for foreign debt investors.
With real yields above 2 per cent and a favorable REER, India offers a compelling investment case. The DSP Mutual Fund report suggests that continued policy improvements, such as tax reforms, could further boost inflows and strengthen India's external sector resilience.
