FPI Outflows from Indian Debt Market Surge to 4-Year High in April 2025

Foreign Portfolio Investors (FPIs) have reversed their stance on Indian debt, exiting to the tune of $2.27 billion in April 2025. This sharp withdrawal follows four straight months of consistent inflows and marks the most significant monthly outflow since May 2020. It is also the first net outflow from Indian debt since November 2024. This pivot underscores a change in global risk appetite, particularly toward emerging market debt instruments.

The Yield Spread Squeeze: India vs the US

One of the primary drivers behind the FPI selloff is the narrowing yield spread between Indian and US bonds. India’s ten-year government bond yield has fallen from 6.6% at the start of April to 6.33%, while its US counterpart has risen from 3.99% to 4.35% over the same period. This has brought the yield differential down to roughly 200 basis points — its lowest since September 2004. With shrinking returns on Indian debt relative to US bonds, foreign investors appear to be reallocating their capital.

Read More: Massive FII Sell-Off: $15.5 Billion Pulled Out in 2025, Market Cap Shrinks by $1.3 Trillion

Global Headwinds and Investor Risk Aversion

Global market conditions have been less than favourable in recent weeks. Persistent inflation in the US, fears of new trade tariffs, and a delay in anticipated rate cuts by the Federal Reserve have all contributed to heightened market volatility. These developments have pushed US bond yields higher, making them more attractive to investors compared to emerging markets, where returns are becoming relatively less competitive.

Regional Pressures and Profit-Booking

Apart from global forces, regional dynamics have also contributed to the outflows. Several Asian markets, including India, have witnessed profit-booking as investors reassess their exposure amid the changing macroeconomic environment. A deteriorating risk-reward profile has prompted FPIs to exit debt positions that were once favoured for their yield advantage.

Domestic Fundamentals Remain Supportive

Despite the FPI retreat, the underlying fundamentals of the Indian debt market remain resilient. Factors such as easing domestic inflation, a dovish outlook from the Reserve Bank of India (RBI), robust liquidity in the banking system, and active open market operations continue to support the market. Borrowing conditions for both government and corporate issuers remain favourable, suggesting that local demand for bonds may absorb some of the foreign selling pressure.

Conclusion

The recent FPI outflows from Indian debt illustrate the complex interplay between global and domestic factors. While India’s macroeconomic environment remains relatively stable, external pressures — particularly in terms of shifting global interest rates — are reshaping capital flows. Going forward, market participants will likely keep a close eye on US monetary policy developments, yield differentials, and geopolitical risks that could influence further investor behaviour in emerging markets.

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