The depreciating rupee and global uncertainties will likely limit foreign inflows into government securities going ahead despite the rating upgrade, said experts. On August 14, S&P upgraded India’s sovereign rating to ‘BBB’ from ‘BBB-’ with a stable outlook, citing economic resilience and sustained fiscal consolidation.
Rupee Weakness Dampens Investor Sentiment
“The currency risk will limit the foreign inflows as their returns will get affected. In the current financial year, the rupee depreciated more than 2% and underperformed its Asian peers despite a weakened dollar index, leading foreign investors to shy away from India,” said Madhavankutty G, chief economist, Canara Bank. He further said “As geopolitical situation is still fluid, it will not improve the confidence of foreign investors to put their money into India.”
The Indian rupee has been under pressure since a while on account of geopolitical events. The domestic currency depreciated 2.21% (189 paise) in the current financial year and 0.28% (25 paise) in the month. Though the dollar index weakened around 10%, the rupee continued to remain under pressure. On the other hand, other Asian peers appreciated followed by the dollar weakness.
Indian rupee was the worst performer compared to its Asian peers in FY26. Taiwanese dollar appreciated 10%, making it the best performing currency. This is followed by South Korean won, which appreciated by 6%.
Yield Spread and FPI Outlook
“As our credit profile further strengthens and we gain inclusion in more global bond indices, we can attract foreign inflows, further diversifying our debt markets,” said Anurag Mittal, head of fixed income, UTI Mutual Fund. He added that more inflows will depend on exchange rate stability and inclusion of Indian bonds in more indices.
According to Gaura Sengupta, chief economist, IDFC FIRST Bank, “The actual inflows will be dependent on how FPIs assess India compared to other emerging markets. Firstly, their assessment on overall emerging markets has to change. Secondly, actually flows into India will be a function of the yield differential between India and the US. If it widens, we will attract more flows depending on how the FPI’s assessment on EMs.”
Currently, 10-year Indian benchmark bond is trading at 6.50% and US Treasury at 4.30%, giving a spread of over 200 bps. FPIs net sold government securities worth Rs 15,156 crore since April, majorly due to profit booking and narrowed spread between Indian and US yields. After the rating upgrade announcement, FPI inflows worth Rs 3,872 crore have come into the government securities market. However, experts doubt the sustained inflows going ahead.