Global yields, rupee expectations, and delayed bond-index inclusion could continue to weigh on overseas investor demand.
Foreign investors may not significantly increase exposure to Indian government bonds in the near term, despite the Centre’s decision to remove taxes on certain overseas investments in sovereign-debt. According to SBI Funds Management’s August 2026 market outlook, the tax changes could improve the attractiveness of Indian bonds, but other market factors are likely to remain more influential in determining foreign portfolio investment.
This assessment comes after the government introduced measures aimed at making Indian government securities more accessible to overseas investors and deepening the domestic bond market. The changes include tax exemptions on interest income and capital gains from eligible government securities.
Removal of taxes may not be enough believes SBI Funds Management.
The removal of taxes reduces one of the costs associated with investing in Indian sovereign bonds. However, SBI Funds Management believes this alone may not be enough to trigger sustained foreign inflows. Investors continue to compare Indian bond yields with returns available in other major markets. When global yields remain elevated, particularly in developed economies, the relative advantage offered by Indian debt can become less compelling.
The rupee is another important consideration. Currency movements can materially affect returns for overseas investors, meaning expectations about the Indian currency could influence whether foreign investors enter or exit the bond market.
Adding pressure may be the delayed global index inclusion.
The postponement of India’s inclusion in a global bond index is another factor that could restrict incremental foreign portfolio investment. Index inclusion can generate automatic demand from funds that track major international bond benchmarks. With that process deferred, SBI Funds Management expects foreign flows into Indian bonds to remain relatively subdued in the short term. Any fresh investment, it said, could be more tactical and closely linked to currency expectations.
Domestic monetary policy will also play a role. SBI Funds Management expects the Reserve Bank of India (RBI) to remain on an extended pause, with any further normalisation of interest rates potentially pushed further into the future.
The fund house pointed to the RBI’s inflation outlook and its focus on core inflation as factors supporting a prolonged period of unchanged policy rates. The RBI’s projections include average headline inflation of 5% for FY2027 and one-year-ahead inflation of 5.3%.
The outlook, therefore, suggests that India’s efforts to attract foreign investment in government bonds may take time to translate into consistently stronger flows.
