New measures from the Reserve Bank of India (RBI) intended to stabilise the rupee have made hedging currency exposure more expensive for foreign investors, particularly those holding Indian debt. The central bank's curbs - designed in part to limit arbitrage trading - have reduced pressure on the currency but have simultaneously increased hedging costs in both onshore and offshore markets, weakening the appeal of Indian bonds.
In the onshore over-the-counter market, one-year hedging costs have climbed by roughly 30 basis points since the RBI implemented the new rules. The effect offshore has been even more pronounced: costs to hedge using non-deliverable forwards (NDFs) have jumped nearly 70 basis points, with NDF hedging costs briefly reaching their highest level in more than 12 years immediately after the measures were announced.
Liquidity in the NDF market - a primary channel through which foreign investors manage rupee exposure - has thinned, making hedging both costlier and harder to execute. That deterioration of liquidity has had a direct effect on the risk-reward calculus for foreign bond buyers. "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 with about $280 billion under management, is currently neutral on Indian bonds.
The timing of the RBI interventions has compounded existing concerns. The outbreak of war in the Middle East has driven oil prices higher, hitting India especially hard because the country imports roughly 90% of its oil needs and is heavily reliant on Middle Eastern supply. Foreign investors have sold about 211 billion rupees ($2.26 billion) of Indian government debt since the conflict began on February 28, according to clearing house data, with sales accelerating following the currency-market curbs.
Some foreign asset managers say the RBI action alters the dynamics for any near-term return of overseas flows. "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, which manages about $140 billion. He pointed to persistent concerns about currency stability and noted that foreign investors tend to re-enter markets more cautiously and more slowly after exiting when currency-related risks remain. "A meaningful rise in bond yields may be needed before sentiment improves," Foo added.
Equities have felt the ripple effects as well. Higher oil costs are intensifying investor worries about corporate earnings, contributing to foreign selling in Indian shares. Since the start of 2025, foreign investors have sold about $38 billion of Indian equities, with outflows reaching a record $12.7 billion in March alone. The conflict has sharpened worries that were already forming around stretched valuations and softening earnings momentum.
"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, which oversees more than $5.5 trillion in assets globally. Brokerages have begun to trim earnings expectations, and analysts expect downgrades to broaden over coming quarters.
Goldman Sachs has reduced its earnings growth forecast for India by a cumulative 9 percentage points over the next two years. Nomura has cautioned that if oil prices remain at current levels, consensus earnings estimates for the current financial year face a 10-15% downside risk; Nomura also lowered its December 2026 target for the Nifty 50 index by 15% to 24,600. The index has fallen more than 7% so far this year.
Market strategists and portfolio managers expect foreign investors to remain cautious even if the regional conflict is short-lived. "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 said most of its Asia and emerging-market equities portfolios are currently underweight Indian equities, while remaining constructive on longer-term prospects.
Collectively, the RBI's hedging restrictions and the oil-price shock have shifted the calculus for foreigners considering Indian assets. Rising costs to protect against currency moves have eroded much of the return potential in government paper, while corporate earnings risks tied to higher input costs and pressured valuations have weakened demand for equities. The net effect has been notable foreign selling in both bond and equity markets in recent weeks.
Data cited in market reports show that foreign investors have offloaded about 211 billion rupees of government debt since February 28 and about $38 billion of equities since the start of 2025, with March seeing record monthly equity outflows. Market participants and large institutional managers say that, unless hedging costs fall or bond yields rise meaningfully, it may take time for sentiment to recover.
($1 = 93.3625 Indian rupees)