By Christina Titus
With India’s entry into global bond indices triggering substantial inflows into the bond markets, the relaxed compliance norms for foreign portfolio investors that exclusively invest in Indian government bonds will further boost the G-Secs market, explains Christina Titus
What do the revised FPI norms mandate?
The Securities and Exchange Board of India (SEBI) has approved the relaxation of a set of rules for GS-FPIs — Foreign Portfolio Investors (FPIs) who invest only in Indian government securities. Under the relaxed norms, SEBI has aligned
the periodicity of mandatory Know Your Customer (KYC) reviews with the Reserve Bank of India‘s requirements, thus reducing the frequency of such reviews. SEBI has also exempted such investors from furnishing their investor group details as they are largely required for monitoring FPI exposures in equity and corporate debt. The revised norms will allow non-resident Indians (NRI), overseas citizens of India (OCI) and resident Indians to be part of GS-FPIs without any investment limit. Moreover, the markets regulator increased the timeline for GS-FPIs to disclose any material changes in their KYC to 30 days. Thus, through the relaxed norms, SEBI intends to reduce the compliance burden for foreign investors who desire to invest in Indian government bonds.
What did the existing guidelines say?
KYC reviews of FPIs are conducted on a periodic basis, once in one year or once in three years based on risk categorisation to warrant updated information. There are caps on foreign investments into equity and debt market. The purchase of equity shares of a company by a single FPI or an investor group is capped at 10% of the total issued capital. These are applicable to FPIs along with their investor group. SEBI mandates the disclosure of investor group details to monitor such investment limits. On composition of FPI corpus, the investment by any individual NRI, OCI or resident Indian is capped at 25% and the overall contribution is restricted to 50%. FPI investors had to disclose material changes within seven days. These tightened compliances and disclosures had complicated the on-boarding process and increased the documentation.
How will this benefit FPIs?
SEBI has said the relaxed norms will “enhance ease of doing business through a risk-based approach and optimum regulation.” It is expected to facilitate foreign investments in the sovereign bond market. The revised norms will smoothen the compliance procedure for FPIs who want to invest in the Indian debt market. It is also expected to ease India’s integration into global bond indices. Indian government bonds were included in the J P Morgan Global Emerging Market Bond Index in June 2024 and the Bloomberg Emerging Market Local Currency Government Index in January 2025.That triggered sizeable passive inflows into the bond markets as global funds adjusted their portfolios to mirror the index constituents. FTSE Russell’s Emerging Markets Government Bond Index is also set to include Indian bonds in September. The inclusion in global indices will bring more passive inflows into the Indian bond market.
Investments through FAR securities
There has been significant increase in FPI investment in the Indian government securities market. FPI investment through the fully accessible route (FAR) surged to Rs 3 lakh crore in March 2025 from Rs 1.74 lakh crore in March 2024, SEBI data showed.
Since the inclusion of Indian government bonds in JP Morgan Global EM Bond Index, government securities received `88,053 crore through FAR. However, FPIs were the net sellers in the G-Secs market in the last two months. Foreign investors sold governments bonds worth Rs 11,145 crore and Rs 12, 317 crore in April and May, respectively. So far in June, FPIs have sold bonds worth Rs 8,488 crore. The outflows are on account of global uncertainties and narrowing spread between Indian government bonds and US Treasury bonds.
FPI inflows hinge on global outlook, yield trends
Looking ahead, foreign investor inflows will depend on decisions by the US Federal Reserve, global yield trends, and the resolution of prevailing uncertainties, says V R C Reddy, head of treasury, Karur Vysya Bank. “Once the global outlook stabilises, we may witness renewed interest from FPIs. Over the long term, India remains an attractive destination owing to its strong macroeconomic fundamentals,” he adds. The tariffs issue which had been on the backburner for sometime due to the Iran-Israel war will again come into the picture as the deadline of July 9 is nearing, which will add further questions on foreign inflows into the debt market. India is expected to witness a rise in inflows after investors get a clearer picture on the tensions in West Asia and tariff-related uncertainties, according to experts.