- Foreign investor interest in Indian government bonds is expected to remain subdued despite tax relief
- SBI Funds cites global bond yields, interest rates, and rupee outlook as key factors for foreign debt flows
- Deferment of India's inclusion in a global bond index may limit incremental FPI in bonds
Foreign investor interest in Indian government bonds is likely to remain subdued in the near term despite the removal of taxes on overseas purchases of sovereign debt, according to SBI Funds Management. Investors are closely watching global bond yields, the domestic interest-rate cycle and rupee expectations, which could determine whether India attracts meaningful foreign debt flows.
In its August 2026 Market Outlook, SBI Funds said the tax relief alone may not be enough to significantly improve demand for Indian sovereign bonds. The deferment of India's inclusion in a global bond index could further limit incremental foreign portfolio investment.
“With the index inclusion being deferred, one should anticipate muted incremental flows into Indian bonds in the near term from FPI's,” SBI Funds report stated.
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Yield Gap, Rupee Outlook Weigh On Demand
According to SBI Funds, the relative yield differential between Indian and global bonds, combined with the current policy cycle and expectations for the rupee, does not offer enough comfort to foreign investors.
The fund house said any foreign inflows that do take place are likely to be tactical rather than structural, with currency expectations playing an important role in investment decisions.
Global interest rates remain another hurdle. SBI Funds expects elevated bond yields in developed markets to persist for some time, citing weaker fiscal conditions and inflation remaining above target in several major economies.
This could reduce the relative attractiveness of Indian debt and provide limited support to domestic bond yields through external flows.
RBI Seen Staying In Prolonged Pause
SBI Funds also expects the Reserve Bank of India to keep interest rates unchanged for a prolonged period, with monetary policy normalisation likely to be pushed further out.
The fund house also noted that the RBI's August policy guidance points towards a prolonged pause. While the central bank's one-year-ahead consumer price inflation projection stands at 5.3%, average headline inflation for FY27 is projected at 5%.
SBI Funds said the RBI's focus on core inflation, which is around its 4% target, gives the central bank room to keep rates unchanged.
The combination of elevated global yields, limited currency comfort, a deferred global bond-index inclusion and a prolonged domestic rate pause therefore means India's bond market may not see a significant foreign inflow boost from tax relief alone in the near term.
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