India’s bond market remains hard to access for foreign investors: Morningstar
Despite growing global index inclusion and rising participation via the fully accessible route, operational barriers and limited market access continue to deter long-term foreign inflows.
MUMBAI: Foreign investors would find India more attractive if the bond market becomes more accessible, said Mike Coop, chief investment officer (Europe, Middle East and Africa) at Morningstar Investment Management.
“I think the bond market is pretty interesting, but harder to access as a foreigner particularly, you can't access it directly very easily. Indian retail investors can't even access it directly very easily, which is crazy," Coop told Mint in an interview.
Morningstar Investment Management, the investment arm of Chicago-based Morningstar Inc., oversees over $300 billion globally, according to its website.
Coop’s comments come as India struggles to attract foreign capital this year amid global uncertainties, ranging from renewed trade tensions under US President Donald Trump to weak domestic earnings and stretched valuations.
Flows falter despite index inclusion
Foreign portfolio investment (FPI) in the Indian bond market has more than halved to $7.98 billion as of 4 November, from $18.30 billion a year earlier, according to NSDL data. Within that, FPIs invested $1.3 billion in the Debt General Limit category this year, while the Debt VRR (Voluntary Retention Route) saw net outflows of $928 million.
The pullback reflects a broader risk-off sentiment toward emerging markets, as investors gravitate toward safer US assets. India’s high equity valuations and weaker earnings momentum have further tempered enthusiasm.
Net sales growth of Nifty 50 companies remained stuck in the 6% range for the fourth straight quarter, rising 6.2% year-on-year in Q1FY26, according to a report by the National Stock Exchange (NSE).
NSE’s analysis of earnings revisions for the top 200 companies by market capitalization showed aggregate FY26 profit estimates were lowered by 0.5% since end-June. As of 5 September, projected earnings growth stood at 11.6%, down from 12.1% at the end of June.
Meanwhile, the Nifty 50’s estimated price-to-earnings (P/E) ratio for the current year is 23.1, well above the MSCI Emerging Markets index multiple of 15.8, underscoring the premium valuations that top Indian companies continue to command.
Interest-rate differentials have also weighed on flows. While the Reserve Bank of India has cut policy rates by a total of 100 basis points (bps) so far this year, the Federal Reserve has eased by only 50 bps, keeping US bond yields relatively attractive.
Even so, foreign participation in Indian government securities available under the fully accessible route (FAR) has been rising. Introduced in 2020, FAR allows non-residents to invest in specified government bonds without investment ceilings. NSDL data show foreign investors have poured $7.6 billion into FAR securities so far in 2025, up from $3.4 billion last year.
The inclusion of Indian bonds in global indices has been progressing steadily. JP Morgan included Indian government securities available under FAR in its GBI-EM Global index suite from 28 June 2024. Bloomberg followed, announcing in March 2024 that it would add select Indian government bonds to its emerging market index, and Indian bonds were officially included in Bloomberg’s emerging market local currency bond index in January 2025.
“Investment in indices should lead to investment in Indian bonds, but the country has not kept pace," said Madan Sabnavis, chief economist at Bank of Baroda.
Operational barriers and regulatory tweaks
Sabnavis attributed the gap to a mix of global uncertainty, the interest rate differential, and the lack of investments in India.
Operational hurdles that continue to make India a difficult market to navigate have also weighed. “They (FPIs) have to comply with various agencies, fill out multiple forms. India also does not have Euroclear so they have to come through the Clearing Corp. of India (CCIL)," said Gaura Sengupta, chief economist at IDFC First Bank.
In the past six months, yields on 10-year government bonds have risen about 20 bps to 6.53% as of 5 November, after touching 6.6% in late August.
Amid the slowdown in foreign flows, Coop’s remarks underscore that improving direct access and liquidity in India’s bond market could help attract longer-term global capital, reducing dependence on volatile equity inflows and deepening the country’s financial markets.
India, for its part, has been trying to court more overseas investors. Last month, markets regulator Securities and Exchange Board of India (Sebi) said that new rules easing regulatory requirements for foreign investors in government bonds will take effect from 8 February 2026, Reuters reported.
Foreign flows have remained subdued on the equity side as well. FPIs have been net sellers of $17 billion so far this year, compared to net buying of $124 million in 2024.
The benchmark Nifty 50 has gained about 5% in the past six months to 25,597 as of 4 November, but investors remain wary of high valuations, slower-than-expected profit growth, and geopolitical uncertainty, despite India’s relatively strong long-term growth story.
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