Foreign portfolio investment (FPI) in Indian bonds is entering a new phase in 2025. With the RBI and SEBI easing rules and India moving closer to global index inclusion, the bond market is opening up like never before. The result – more room for foreign capital and greater market stability.
Regulatory Changes: RBI and SEBI’s 2025 Initiatives
RBI’s measures
In May 2025, the Reserve Bank of India removed the short-term investment limit and concentration limit for FPIs in corporate debt. This step gives investors more flexibility in managing their bond holdings and ensures smoother participation in the corporate debt market.
At the same time, the RBI kept the overall investment ceilings unchanged for FY 2025–26:
- 6% of outstanding government securities
- 2% of state loans
- 15% of corporate bonds
This maintains stability while leaving adequate space for future inflows.
SEBI’s initiatives
SEBI has introduced a simplified framework for FPIs investing only in government bonds, called the IGB-FPI category. Approved in June 2025, it eases KYC requirements, extends reporting timelines, and provides more flexibility for participation from NRIs and OCIs. These measures reduce compliance processes and are expected to support consistent foreign investment in government securities.
Market Trends: FPI Flows and Yields
Foreign investment in Indian corporate bonds has picked up sharply in 2025. In May, FPIs brought in around ₹20,996 crore, the highest monthly inflow in nearly a decade. This included the Shapoorji Pallonji Group’s corporate bond issuance offering a 19.75% annual yield, which drew strong overseas interest.
- After a brief dip in April, when FPIs sold about ₹8,879 crore, flows turned positive again in May as domestic rate cuts and attractive yields improved sentiment.
- Meanwhile, the yield gap between Indian and US 10-year government bonds has narrowed to about 204 basis points in mid-2025. While a smaller gap can slow foreign inflows, the recent rebound shows that India’s higher yields continue to appeal to investors.
Despite the surge, FPIs have used only about 16.7% of their permitted corporate bond limits (₹1.28 trillion used out of around ₹6.35 trillion). This shows there is still significant headroom for more foreign participation in the Indian bond market.
Global Index Inclusion: Impact and Implications for Indian Bonds
The inclusion of Indian government bonds in major global indices such as JP Morgan, Bloomberg, and FTSE Russell is expected to bring large passive inflows from international funds. This step is likely to deepen the Indian debt market and improve overall market liquidity.
Foreign investors are also showing a clear preference for government securities under the Fully Accessible Route (FAR). These bonds now account for more than 90% of recent debt FPI flows, reflecting growing confidence in India’s regulatory framework and market openness.
As passive investments increase, the demand for Indian government bonds is expected to stay strong, supporting market stability and helping integrate India more closely with global financial markets.
Key Risks and Market Factors
Global and Domestic Influences
FPI flows in Indian bonds are closely linked to global interest rate cycles, currency movements, and yield gaps between India and other emerging markets. Shifts in these factors often influence the pace and direction of foreign investments.
Recent Market Trends
In early 2025, foreign investors pulled back due to rupee depreciation and global market headwinds. However, by mid-2025, easing inflation and supportive domestic policies helped revive sentiment and bring flows back into the bond market.
Regulatory and Structural Shifts
With certain investment limits removed, investors now have broader access across categories such as shorter-duration and higher-yield corporate bonds. At the same time, India’s inclusion in major global bond indices and evolving regulations are shaping the structure and scale of future foreign participation.
Final Thoughts
Foreign investment in Indian bonds is entering a new phase. Regulatory relaxations, strong domestic fundamentals, and the inclusion of Indian government bonds in major global indices are drawing sustained global interest.
While shifts in currency, global rates, and policy cycles can influence short-term flows, the overall market landscape is becoming more open and liquid. The evolving landscape of Indian bonds makes them an increasingly significant component of global fixed-income portfolios. They offer substantial depth and promising long-term growth prospects.
Frequently Asked Questions
1. What is the Fully Accessible Route (FAR) and why does it matter?
FAR is a category of government bonds that are fully open to foreign investors without any restrictions. Most bonds chosen for global indices like JP Morgan, FTSE Russell, and Bloomberg are FAR-eligible, which is why foreign investors prefer them.
2. How much foreign investment is expected after India’s bond index inclusion?
According to Business Insider India, India’s inclusion in global indices is expected to attract $25 billion in foreign inflows between mid-2024 and 2025. This could significantly increase liquidity in Indian bond markets.
3. What are the current FPI investment limits for Indian bonds?
As per the RBI’s FY25–26 guidelines:
- Government securities: 6% of total outstanding stock
- State development loans (SDLs): 2%
- Corporate bonds: 15%
There’s still ample unused headroom within these limits.
4. What risks could affect future foreign inflows?
FPI flows can change quickly due to:
- Global interest rate trends
- Rupee volatility
- Inflation and growth outlook
- Changes in RBI or SEBI regulations
5. Has SEBI simplified rules for FPIs in government bonds?
Yes. SEBI has eased compliance norms for FPIs investing only in government bonds. This includes simpler KYC, fewer disclosure requirements, and faster approvals, making it easier for low-risk investors to participate.
