Foreign portfolio investors (FPIs) have withdrawn ₹17,689 crore from fully accessible route (FAR) government securities since the beginning of the Middle East conflict, as rising crude oil prices and a weakening rupee raised fears of imported inflation and potential monetary tightening.

Data from the Clearing Corporation of India shows that FPI holdings in FAR bonds declined to ₹3,13,318.66 crore as of April 1, down from ₹3,31,007.65 crore on February 27, reflecting a consistent reduction in exposure by overseas investors in recent weeks.

The outflows from FAR bonds have coincided with a rise in domestic bond yields, as escalating geopolitical tensions pushed global oil prices higher, raising inflation concerns and tightening financial conditions across emerging markets.

During the period under review, yields on Indian government securities, particularly the benchmark 10-year bond, rose by around 33 basis points. On March 30, the yield touched the 7% mark, its highest level in more than 20 months.

The weakness in the rupee further contributed to the spike in bond yields. The Indian rupee breached the 95-per-dollar mark for the first time, touching an all-time low of 95.12 against the US dollar on March 30, despite recent steps by the Reserve Bank of India (RBI) to tighten banks’ forex exposure norms.

The rupee, now among the weakest Asian currencies, has depreciated over 4.4% since the onset of the Iran conflict, amplifying concerns over India’s external balances. The sharp currency decline, combined with a surge in crude oil prices, has intensified fears of a widening current account deficit (CAD) and rising inflationary pressures.

According to a report by YES Bank, India’s 10-year G-sec yield is likely to remain elevated in the 6.75%–7.25% range in the first half of FY27, reflecting persistent pressures from global yields, fiscal dynamics, and continued rupee weakness. “Given the above fiscal issues, continuing pressure from global yields and a likely depreciation pressure on the INR, India’s 10-year yield could be in the range of 6.75%–7.25% in H1FY27,” the report said.

Bank of Baroda, in a latest report, also said that India’s bond market is likely to remain under pressure in the near term after witnessing sharp volatility in the second half of FY26. Dipanwita Mazumdar expects India’s 10-year government bond yield to trade in the 6.9–7.10% range in the near term, with an upward bias, unless the ongoing war situation de-escalates.

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 around 6.65% in January 2026, further to 6.70% in February, and 6.75% by March.

(With PTI inputs)