Foreign institutional investors (FIIs) offloaded around ₹60,000 crore worth of financial sector stocks in March, in sync with the sharp sell-off in the Nifty Bank index, amid concerns that rising sovereign bond yields could lead to mark-to-market losses on banks’ government securities portfolios.

The Nifty Bank index declined nearly 16% during the month, recording its steepest fall in six years since March 2020, and wiping out over ₹9 lakh crore in market capitalisation.

The financial sector accounted for about 51% of total FII outflows in March. Overall, FIIs pulled out more than ₹1.12 lakh crore from Indian equities, making it one of the sharpest monthly outflows in recent years, according to NSDL data.

VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, noted that foreign portfolio investors (FPIs) sold a record ₹1.22 lakh crore worth of equities in March, with the selling trend extending into April.

“Since financials form the largest share of FPI assets under custody, most of the selling has been concentrated in this segment. This has created a paradoxical situation where FPIs are offloading high-quality, attractively valued stocks with strong long-term growth potential. The banking sector continues to see healthy credit growth and strong asset quality. The current FPI selling is largely short-term in nature, driven by rupee weakness and elevated US bond yields. Long-term investors with patience may find opportunities in high-quality financial stocks, particularly leading banks,” he said.

Data shows that the selling was evenly distributed through the month, with FIIs offloading over ₹31,830 crore worth of financial stocks in the first half of March, followed by another ₹28,800 crore in the second half.

Among individual stocks, HDFC Bank was a key laggard, with its shares declining nearly 18% during the month after the unexpected resignation of part-time Chairman Atanu Chakraborty.

What triggered sell-off in banking stocks

The banking stocks faced selling pressure on concerns that rising bond yields could trigger mark-to-market losses on their government securities holdings. The yield on the 10-year government bond rose more than 37 basis points in March, crossing the 7% mark and touching a one-year high, amid persistent weakness in the rupee.

The Indian rupee breached the 95-per-dollar mark for the first time, hitting an all-time low of 95.12 against the US dollar, despite recent measures by the Reserve Bank of India (RBI) to tighten banks’ forex exposure norms. Now among the weakest Asian currencies, the rupee has depreciated over 4.4% since the start of the U.S.-Israel-Iran conflict, raising concerns over India’s external balances.

The sharp currency depreciation, coupled with a surge in crude oil prices, has intensified fears of a widening current account deficit (CAD) and rising inflationary pressures.

Bond yields seen hovering around 7%

According to a report by YES Bank, India’s 10-year government bond yield is expected to remain elevated in the 6.75%-7.25% range in the first half of FY27, reflecting pressure from global yields, fiscal dynamics, and continued rupee weakness.

“Given the fiscal challenges, persistent global yield pressures, and likely depreciation bias in the rupee, the India 10-year yield could remain in the 6.75%–7.25% range in H1FY27,” the report said.

Dipanwita Mazumdar, Economist at Bank of Baroda, expects the 10-year yield to trade in the 6.9%-7.10% range in the near term, with an upward bias unless geopolitical tensions ease.

She noted that the 10-year yield remained volatile through FY26—starting at around 6.40% in April 2025, moving largely range-bound in the initial months, and then inching higher in the second half. Yields rose to about 6.65% in January 2026, further to 6.70% in February, and 6.75% by March, reflecting sustained upward pressure from global cues, rising crude prices, inflation concerns, and currency weakness.

While the first half of the fiscal year saw a softening trend supported by benign inflation, an easing monetary policy cycle, and RBI liquidity measures, yields turned sticky later due to concerns over increased government bond supply. Adding to the woes, the central bank is widely expected to maintain the status quo in its first policy announcement of fiscal 2027 on April 8, amid a fragile global environment due to the Middle East crisis and rising crude prices. 

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