FIIs sell $1.2 billion in Indian debt in April as U.S. yield gap narrows

India’s debt market is currently facing a bout of uncertainty, with foreign institutional investors (FIIs) turning cautious amid global and domestic headwinds. Rising geopolitical tensions, a spike in crude prices, rupee volatility, and tighter monetary conditions have prompted overseas investors to pull money out of Indian debt.

Data from NSDL shows that FIIs have withdrawn over $1 billion from the debt market so far this month. This has been attributed to a slew of factors such as currency volatility, high hedging costs, shifting global yields, and narrowing returns compared to safer assets.

The data showed that FIIs have offloaded more than $1.23 billion of Indian debt, indicating that this would be the sharpest outflow since April 2025. Last month, they had sold over $977 million in India’s debt market.

Key reasons behind FIIs’ exit

A key reason behind this cautious stance is the shrinking yield gap between Indian and U.S. bonds. The gap between Indian government bond (G-Sec) yields and U.S. Treasury yields has narrowed to around 200-250 basis points, down from the historical average of 300-400 basis points, making the risk-adjusted return of Indian debt less attractive compared to its U.S. counterpart.

Adding to the woes, the sharp correction in the Indian rupee against the U.S. dollar in the backdrop of the recent West Asia crisis has spiked the cost of hedging currency risk. The Indian rupee breached the 95-per-dollar level for the first time this month, making it one of Asia's worst-performing currencies. For foreign investors, currency depreciation eats into their total returns when they convert Indian gains back into dollars.

As of April 17, 2026, the yield on India’s 10-year G-Sec stands at 6.94%, which is 269 bps higher than the U.S. 10-year Treasury yield of 4.25%.

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 said 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 pressure, 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.

YES Bank, in its latest report, also said that 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 the 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.