FPIs turn adventurous, focus on high yielding debt

Rather than commit funds to G-Secs with low spreads and limited upside, FPIs are increasingly eyeing corporate bonds that offer higher yields and better risk-adjusted returns. 
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In their quest for higher returns from India’s debt markets, foreign portfolio investors (FPIs) have become adventurous and are turning towards high yield, low rated corporate papers.

They are stepping up focus on high yielding debt even as yield on investment from risk-free government securities (G-Secs) has turned less attractive in the backdrop of narrowing of spreads vis-a-vis US Treasuries (USTs).

In this regard, debt market players cite the recent example of the Shapoorji Pallonji Group raising $3.4 billion via issuance of three-year zero-coupon bonds yielding 19.75 per cent from foreign investors, including FPIs.

Regulatory changes

This also comes in the context of regulatory changes last month whereby investment by FPIs in corporate debt securities no longer face short-term investment limit and concentration limit. 

It may be pertinent to mention here that FPIs sold G-Secs aggregating ₹25,544 crore under FAR (fully accessible route) in the first quarter of FY26, the first such quarterly sale after their inclusion in global indices.

Venkatakrishnan Srinivasan, Founder and Managing Partner of Rockfort Fincap LLP, underscored that the broader India story remains attractive to FPIs, with the country’s stable macroeconomic outlook, credit growth and well-contained inflation providing a strong long-term investment case.

Corp bonds

However, rather than commit funds to G-Secs with low spreads and limited upside, FPIs are increasingly eyeing corporate bonds that offer higher yields and better risk-adjusted returns.

“This shift was clearly visible in a recent large unrated, unlisted, high-yield bond issuance, which attracted strong FPI and foreign bank interest despite the absence of a formal rating.

“The successful closure of that deal has been widely seen as a turning point, triggering renewed FPI interest in India’s credit space,” Venkatakrishnan said.

He said that a few FPIs recently evaluated investments in AA-rated corporate bonds. This indicates that while being selective, FPIs are open to moving down the rating curve from AAA if the pricing is attractive and justifies the risk.

Deepak Sood, Partner and Head Fixed Income, Alpha Alternatives, said: “We’re definitely seeing more interest from FPIs in high-yield NCDs (non-convertible debentures), though it remains quite deal-specific.

“G-Secs have long been the default choice for rate and duration exposure, but with the spread between US Treasuries and Indian G-Secs narrowing, flows have started to slow. Index-related flows have also tapered off.”

Structured credit

At the same time, there’s growing appetite for higher-yielding, structured credit — especially when the return profile justifies the risk, opined Sood.

“We expect more such issuances through FY26 as the domestic credit market deepens and investors look beyond plain vanilla opportunities,” he said.

The spread between 10-year UST and 10-year G-Sec has compressed significantly over the last few years from 400-500 basis points (bps) to about 180 bps now.

This compression has reduced the relative attractiveness of Indian sovereign bonds for global investors, Venkatakrishnan said. Additionally, there has been some degree of profit booking by FPIs following the sharp fall in Indian G-Sec yields, further contributing to the muted demand.

“The yield spread remains the core attraction: while 10-year G-Sec (6.33 per cent GS2035) yield is at ~6.20 per cent, corporate bonds in the AA to BBB– category are approximately offering yields between 8.25 per cent and 13 per cent (or higher in some cases).

“This implies a spread pickup of over 200 to nearly 700 bps (spread may be higher shorter tenor), depending on credit quality and structure,” the RockFort Fincap Founder said.

He underscored that for FPIs seeking higher returns with acceptable credit risk, these spreads provide meaningful incentive when funding costs are stable or fully hedged.

During FY25, foreign portfolio investment registered a sharply lower net inflow amounting to $1.7 billion as compared to net inflows of $41.6 billion during the previous year, according to RBI’s latest annual report.

Debt segment

However, the debt segment witnessed steady FPI inflows amounting to $17.4 billion on the back of inclusion of Indian sovereign bonds in global bond indices.

Equity FPI flows, however, recorded net outflows of $ 15.7 billion during the same period as against net inflows of $25.3 billion in 2023-24, mirroring trends in other EMEs with rising risk-off sentiments leading to selloffs in the equity segment during April-May 2024, October-November 2024 and January-February 2025.

FPIs search for high yields in debt:

@FPIs seem to have turned their attention to high yield bonds

@Yield on investment from G-Secs has turned less attractive

@This also comes in the wake of regulatory changes whereby investment by FPIs in corporate debt securities no longer face short-term investment and concentration limits

@Yield spread between 10-year UST and 10-year G-Sec has compressed below 200 bps

Published on June 5, 2025