Foreign Investors Find India's Bond Market Attractive But Difficult to Access, Says Morningstar CIO

Mike Coop, Chief Investment Officer (Europe, Middle East and Africa) at Morningstar Investment Management, highlighted that India's bond market presents an attractive investment opportunity but is difficult for foreigners, and even Indian retail investors, to access directly. This observation is pertinent as India has seen a substantial drop in foreign capital inflows this year amidst global economic uncertainties. Foreign Portfolio Investment (FPI) in the Indian bond market has fallen by more than half, from $18.30 billion a year ago to $7.98 billion as of November 4. This decline is attributed to a broader 'risk-off' sentiment in emerging markets, coupled with India's high equity valuations and slower earnings growth. The Nifty 50 companies reported modest sales growth, and profit estimates for FY26 have been lowered, while the Nifty 50's P/E ratio remains significantly higher than the MSCI Emerging Markets index. Interest rate differentials also play a role, with the US Federal Reserve's monetary policy keeping US bonds relatively attractive. However, foreign investment via the Fully Accessible Route (FAR), which allows investment in specified government bonds without ceilings, has increased, with $7.6 billion invested so far in 2025. The inclusion of Indian government securities in global indices by JP Morgan and Bloomberg is also progressing.

Impact: Improving access to India's bond market could attract substantial long-term foreign capital, reduce reliance on volatile equity inflows, and deepen India's financial markets. This could lead to more stable currency and bond yields, benefiting the broader economy. Rating: 7/10

Difficult Terms: Foreign Portfolio Investor (FPI): An investor from one country that purchases securities in another country's financial markets. Debt VRR (Voluntary Retention Route): A channel for foreign investors to invest in Indian debt instruments with a requirement to retain investments for a specified minimum period. Nifty 50: A benchmark index representing the top 50 largest and most liquid companies listed on the National Stock Exchange of India. Price-to-Earnings (P/E) ratio: A valuation metric used to compare a company's stock price to its earnings per share. A higher P/E ratio often suggests that investors expect higher earnings growth in the future, or that the stock is overvalued. Basis points (bps): A unit of measure used in finance to describe small changes in interest rates or other percentages. 100 basis points equal 1 percent. Fully Accessible Route (FAR): A specific route introduced for non-residents to invest in certain Indian government securities without any investment ceiling, offering direct market access. Euroclear: A financial market infrastructure company that provides post-trade services, including settlement, custody, and collateral management for securities transactions across Europe and other regions. Clearing Corporation of India (CCIL): An institution that provides clearing, settlement, and guarantee services for trades in money, government securities, and foreign exchange markets in India. Securities and Exchange Board of India (Sebi): The statutory body responsible for regulating the securities market in India.