The ongoing West Asia conflict is weighing heavily on Indian markets, with foreign portfolio investors (FPIs) becoming net sellers of Rs 14,403 crore in March so far – the highest ever – from government securities under the fully accessible route (FAR), according to Clearing Corporation of India (CCIL) data.
In contrast, FPIs were net buyers in the previous month. They purchased securities worth Rs 7,445 crore in February and Rs 14,625 crore in January.
The FPI holding in government securities fell to Rs 3.16 lakh crore as of March 27 from Rs 3.31 lakh crore in the previous month. In the current financial year (FY26), FPIs net bought government debt worth Rs 10,356 crore, the lowest in five years. For comparison, they pumped a record Rs 1.32 lakh crore in FY25.
Currency Volatility
“The ongoing war is exerting significant pressure on the debt market. Investors are losing interest in deploying funds to a country with such volatile and depreciating currency, as the weakening rupee erodes their returns,” said Madhavankutty G, chief economist at Canara Bank.
The Indian rupee has fallen 4.2% since the beginning of the war. The currency is fast closing in on 95 against the dollar. On Friday, it breached 94 for the first time and closed at 94.82. This sharp fall on Friday has taken the year-to-date depreciation of the rupee to 10.94%, the highest in 14 years.
Rising Yields
“The inflationary impact of higher oil prices has reduced the probability of near-term rate cuts and, in fact, raises the risk of a prolonged tight policy stance, which has weighed on long-duration bonds like FAR securities,” said Kunal Sodhani, treasury head at Shinhan Bank. The yield on 10-year benchmark bond rose by 28 bps in March to 6.94%.
Market participants expect the foreign investors will be refraining from the Indian market as long as the war persists and the rupee remains volatile.
Sodhani said that near-term flows may remain volatile given global uncertainties, but the medium-term outlook is constructive. “Index inclusion-driven passive flows and relatively attractive real yields should support a gradual return of FPI interest once external conditions stabilise.”