India’s bond market is entering a new phase. For many years, the country had a large government bond market, but foreign investors had only a limited role in it. The government and the Reserve Bank of India (RBI) followed a careful approach toward foreign capital. The aim was to bring in foreign money without making the domestic bond market too exposed to sudden global shocks.
That approach has changed over time. India has slowly made it easier for overseas investors to buy government bonds. At the same time, it has worked to improve market access, trading systems and settlement rules. A major step came in March 2020 with the Fully Accessible Route, or FAR.
FAR allows foreign investors to buy certain Indian government securities without the usual foreign investment limits. This gave global investors a much easier route into India’s sovereign debt market. It also laid the base for a much bigger change: India’s entry into major global bond indexes.
Why Global Bond Indexes Matter
Global bond indexes are important because many large funds use them as a guide for where to put their money. Some funds actively choose bonds, while others simply track an index. When a country enters a major index, its bonds can receive fresh demand from both types of investors.
India’s bond index story gained pace after major global index providers began to add Indian government securities to their benchmarks. JPMorgan’s inclusion of eligible Indian government bonds was a major event for the market.
The effect was visible in foreign flows. The Economic Survey reported cumulative foreign portfolio investment debt inflows of about ₹1.1 lakh crore between October 2023 and June 2024, after the announcement of India’s index inclusion. After the effective inclusion date, another ₹62,431 crore flowed into debt between July and November 2024.
These numbers show why index access matters. Foreign money does not enter the market only because investors like Indian interest rates. Index inclusion can create a more regular source of demand because funds that track an index need to hold the securities that form part of it.
FAR Created the Base for Foreign Access
The Fully Accessible Route has played a central role in this change. It created a group of Indian government securities that foreign investors could buy with fewer restrictions.
This was important because large global funds need a market where they can enter and exit with reasonable ease. A market may have strong economic growth and attractive yields, but that alone is not enough. Investors also need clear rules, easy settlement and enough trading activity.
India’s policy approach has therefore moved beyond a simple question of whether foreigners can buy government bonds. The larger question is whether they can trade those bonds at scale.
This is where market depth becomes important.
What Market Depth Really Means
A deep bond market is not simply a market with a large amount of debt. It is a market with many buyers and sellers, regular trading and strong liquidity across different maturities.
Liquidity matters because a large investor may need to buy or sell a very large amount of bonds. If only a few bonds trade often, such a trade can move prices sharply. That can raise the cost of entering or leaving the market.
A deeper market can reduce this problem. It can support better price discovery, tighter trading costs and smoother transactions. It can also help banks, companies, pension funds, insurers and foreign investors manage interest-rate risk.
For India, this matters for a much larger reason. A strong bond market can give the economy a wider source of finance. It can help the government raise funds through debt markets and can also support better pricing for other rupee assets.
Index Inclusion Needs More Than Open Rules
India’s progress also shows that legal access is only one part of the story.
Global index providers look at several market conditions before they add securities to their benchmarks. Investors need to know that bonds have enough trading activity, that there is a workable two-way market and that large funds can copy the index without facing very high transaction costs.
This creates a useful cycle. Better rules can make it easier for foreign investors to enter. More foreign investors can raise trading activity. Higher trading activity can improve liquidity. Better liquidity can then make the market more attractive to other global investors.
But this cycle can also slow down if the market does not develop fast enough.
Bloomberg’s treatment of Indian FAR securities in 2026 showed this issue. Its review of Indian bonds for the Global Aggregate Index was deferred. The provider said recent market reforms needed time to become part of normal market practice and that operational efficiency needed to be clear across investors.
This shows that global investors care about the full market structure, not just the formal removal of investment limits.
The Focus Is Now on the Yield Curve
India has also taken steps to make foreign access broader across the government bond market.
As of May 12, 2026, foreign portfolio investors held about ₹3.75 lakh crore of Indian government securities. This was equal to 3.34% of the outstanding government securities stock.
FAR securities made up ₹3.21 lakh crore of those holdings. This was equal to 6.74% of the FAR-eligible stock.
The government later expanded FAR to include new 15-year, 30-year and 40-year government securities. Eligible sovereign green bonds were also brought into the route.
These changes matter because foreign investors should not have access only to a small set of popular bonds. A deeper market needs activity across more parts of the yield curve.
For example, an investor with a long-term liability may prefer a 30-year bond, while another investor may prefer a shorter maturity. A wider range of accessible securities gives investors more ways to manage risk and match their investment needs.
Foreign Flows Can Still Change Quickly
Index inclusion can create large and steady demand, but it does not remove market risk.
Foreign bond investors still watch US interest rates, the difference between Indian and US yields, the rupee, inflation, oil prices and global risk sentiment. A major change in any of these factors can affect foreign demand.
The 2026 market showed this clearly. Reuters reported that FAR inflows rose after RBI measures and tax changes. Foreign investors bought roughly ₹42,600 crore between June 1 and July 23, 2026.
Later, they sold around ₹6,500 crore over five trading sessions. The move came amid pressure from geopolitical and oil-market concerns as well as uncertainty over Bloomberg’s index decision.
This does not mean index-linked flows have little value. It simply shows that foreign capital can still move when global or domestic conditions change.
Why India Wants a Deeper Bond Market
The larger policy goal goes beyond foreign investment.
India needs a strong domestic debt market as its economy grows. A deeper market can help the government raise funds in a more efficient way. It can also help companies and financial institutions access long-term capital.
A stronger bond market can improve price discovery for interest rates across the economy. Government bond yields act as an important reference for many other financial assets. Better liquidity in government bonds can therefore have an effect far beyond the sovereign debt market.
There is also a globalisation angle. If Indian government bonds become easier for global funds to access, India can become a more normal part of international fixed-income portfolios.
That process can bring more foreign capital, but it can also increase India’s exposure to global market movements. This is why the policy path has been gradual rather than a sudden opening of the entire debt market.
From Access to Market Depth
India’s bond-market policy has now moved from the first question of access to a harder question of depth.
FAR helped create easier foreign access. Global index inclusion brought new demand. The next task is to make sure that the market can handle this demand across a wider range of bonds and under different market conditions.
The numbers already show a major change. Foreign investors held ₹3.75 lakh crore of Indian government securities as of May 12, 2026, with ₹3.21 lakh crore in FAR securities. The earlier ₹1.1 lakh crore of debt inflows between October 2023 and June 2024, followed by ₹62,431 crore between July and November 2024, also showed the impact of the index-access story.
Yet the next stage will depend on market quality. Trading depth, liquidity, settlement, hedging tools and investor access will matter as much as the headline size of foreign flows.
The Road Ahead
India’s bond-market story is therefore not only about attracting foreign money. It is about building a market that can absorb that money in an orderly way.
The policy path has moved through several stages. First came cautious foreign investment rules. Then came FAR in March 2020. After that came global index inclusion and a rise in foreign debt flows. Now the focus is on wider access, better liquidity and stronger market systems.
The long-term goal is clear in economic terms: create a government bond market that is large, liquid and accessible enough for both domestic and global investors.
If India can build that depth while keeping the market stable, global index access can become more than a source of foreign inflows. It can become part of the wider development of India’s financial system.
The real policy story, then, is not simply about how much foreign money enters India’s bond market. It is about whether India can turn that foreign participation into a deeper, more efficient and more resilient market.
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