MUMBAI, April 15 - Policy steps aimed at stabilizing the rupee have significantly increased hedging costs for foreign investors, undermining the carry and roll-down appeal of Indian government bonds and contributing to a broader reassessment of risk for overseas allocators.
The Reserve Bank of India has implemented curbs designed to limit arbitrage trades and dampen pressure on the currency. While those measures have helped steady the rupee, they have also pushed up the expense of hedging in both domestic over-the-counter markets and in offshore non-deliverable forward (NDF) markets.
Market participants say one-year hedging costs in the onshore market have climbed by roughly 30 basis points since the RBI actions were introduced. Offshore, the rise has been steeper: NDF hedging costs have increased by close to 70 basis points, at one point reaching their highest reading in more than 12 years.
Liquidity in the NDF market - a major avenue through which foreign investors manage rupee exposure - has thinned, making it both more expensive and more difficult to execute hedges. "Such high hedging costs wipe out almost all the carry and roll-down from Indian government bonds," said Matthew Kok, a portfolio manager at Eastspring Investments. "Investors are being paid much less for the risks they take." Eastspring, an Asia-focused asset manager, manages about $280 billion and is currently neutral on Indian bonds.
Bond outflows and wider investor behavior have reflected the change. Since the Iran conflict began on February 28, foreign holders have sold about 211 billion rupees - approximately $2.26 billion - of Indian government debt, according to clearing house data. Sales accelerated after the FX curbs were announced, indicating investors are reacting to both the tighter hedging environment and to broader geopolitical risks.
Several market strategists say the RBI measures mean that elevated oil prices are no longer the sole determinant of when foreign flows might resume. "I do not expect sentiment toward India to shift quickly, even if oil prices ease from here," said Nigel Foo, head of Asian fixed income at First Sentier Investors, noting lingering concerns about currency stability. The parent company, First Sentier Group, manages about $140 billion. He added that foreign investors generally return more slowly after exiting when currency-related risks persist, and suggested that a substantial rise in bond yields could be needed before sentiment improves.
On the equity side, the impact of surging oil prices has compounded existing vulnerabilities. Equity investors have sold roughly $38 billion of Indian shares since the start of 2025, with March marking a record month: foreign outflows from Indian equities totaled $12.7 billion that month alone.
Analysts point to multiple stresses that predated the Iran war. "Even before the conflict, India was facing headwinds from elevated valuations, AI-led disruption risks and softening earnings momentum," said Angela Lan, senior strategist of investment strategy and research at State Street Investment Management. State Street oversees more than $5.5 trillion in assets globally.
Brokerages are already trimming profit forecasts, and broader downgrades are expected to follow. Goldman Sachs has cut its earnings growth forecast for India by a cumulative 9 percentage points over the next two years. Nomura has warned that if oil prices persist at current levels there is a 10 to 15% downside risk to consensus earnings estimates for the current financial year, and has lowered its December 2026 target for the Nifty 50 index by 15% to 24,600. The Nifty 50 has fallen over 7% so far this year.
Investors say that even a relatively swift resolution of the conflict may not be enough to reverse near-term risk aversion. "Even if the conflict is resolved within weeks, we would still expect foreign investors to remain largely in risk-off mode in the near term," said Rita Tahilramani of Aberdeen Investments. Aberdeen noted that most of its Asia and emerging market equities portfolios are currently underweight Indian equities, while remaining constructive on longer-term prospects.
In summary, the combination of regulatory FX steps that increase hedging costs and a war-driven rise in oil prices has altered the risk-reward calculus for foreign investors in India. The result has been a notable pullback from both fixed income and equity markets, with broker downgrades and consensus adjustments adding to pressure on valuations.
Exchange rate used in reporting: $1 = 93.3625 Indian rupees.