Foreign Investors Flee Indian Bonds Amid Oil Price Surge and Index Uncertainty

Foreign investors have been selling Indian bonds at an alarming rate since the recent surge in oil prices due to the US-Iran conflict. According to clearing house data, they have net sold ₹65 billion ($682 million) of securities under the Fully Accessible Route over the past five sessions.

This sharp reversal comes just two months after foreign investors accumulated Indian bonds following the Reserve Bank of India's (RBI) policy measures to attract dollar inflows. Between June 1 and July 23, they poured ₹426 billion into FAR bonds, which are included in three major emerging-market debt indexes.

The RBI's policy moves were accompanied by the Indian government scrapping taxes on foreign investment in government bonds. This sparked expectations that India was moving towards inclusion in Bloomberg's flagship Global Aggregate Index, boosting foreign sentiment.

However, with oil prices surging over 30% in three weeks and briefly topping $100 a barrel, investors are now facing uncertainty over the near-term outlook. Norbert Ling, head of fixed-income portfolio management for Asia-Pacific at Invesco, noted that Iran-related tensions could keep oil prices higher and weigh on both the rupee and bond performance.