ETMarkets Smart Talk | RBI's FPI reforms and index inclusion could unlock up to $25 billion in debt inflows: Dhawal Dalal of Edelweiss MF

India's efforts to deepen its bond market and attract foreign capital could receive a meaningful boost following the Reserve Bank of India's latest reforms for foreign portfolio investors (FPIs).

By removing key investment restrictions on government securities and expanding market access, the central bank has paved the way for stronger overseas participation at a time when India is also seeking greater representation in global bond indices.

In an interaction with Kshitij Anand of ETMarkets, Dhawal Dalal, President & CIO – Fixed Income at Edelweiss Mutual Fund, said the combination of regulatory easing and potential inclusion in widely tracked global bond indices could bring up to $20–25 billion in incremental debt inflows over the next 12–24 months.

While global macro conditions and currency expectations will continue to influence investor behaviour, Dalal believes the reforms strengthen India's appeal as a destination for long-term fixed-income capital.

He also shared his views on the RBI's decision to keep rates unchanged, the outlook for the interest rate cycle, the impact of elevated crude oil prices, and what the latest policy measures could mean for government bond yields and the rupee. Edited Excerpts –

Q) The RBI chose to keep the repo rate unchanged at 5.25% despite increasing global uncertainties. What factors do you think drove the MPC's decision to stay on hold and do you think it is the right one?

A) While a section of the bond market expected a 25 bp hike amid INR depreciation and rising inflation risks, the RBI chose to reinforce that its rate policy is targeted at inflation—not FX management. Comfort from April CPI below 4% and core inflation ~3% likely supported the pause. That said, a token hike could have strengthened its anti-inflation credibility.

Q) The central bank retained its neutral stance even as inflation risks have risen. Does this indicate that the rate-cut cycle has effectively come to an end?

A) The rate-cut cycle in India appears to have ended, with the next move likely upward. The sequencing—whether via a shift in stance or an actual hike—remains uncertain. Markets are likely to focus more on rate action than on the policy stance.

Q) The policy statement repeatedly highlights elevated energy prices as a key risk. At what crude oil price does India's macroeconomic outlook become meaningfully vulnerable?

A) Sustained crude oil prices above $120/bbl would materially stress India’s macro outlook. With crude oil imports at ~$175 billion in FY26 (avg. $65–70/bbl), such levels could add ~$50 billion in additional burden over six months, alongside broader second-order economic impacts.

Q) RBI has removed the short-term investment limit, security-wise limit, and concentration limit for FPIs investing in government securities under the General Route. How significant is this reform for attracting foreign capital into Indian debt markets?

A) The removal of tax frictions and investment limits is a significant step toward attracting FPI flows into Indian government bonds. Coupled with expansion under the Fully Accessible Route, this also strengthens the case for inclusion in widely tracked Bloomberg Barclay’s global bond indices, which can drive medium-term passive inflows.

Q) What impact could this move have on government bond yields, particularly in the longer end of the curve?

A) These measures are likely to be positive for the IGB curve, with yields biased lower. We could also see a mild steepening at the longer end as markets price in incremental FPI inflows at short-end.

Q) Do you expect foreign investors to increase allocations to Indian debt immediately, or will global macro conditions remain the deciding factor?

A) Given global tightening expectations and relatively compressed India–US yield spreads, FPIs may remain cautious near term. However, currency expectations will be key—any conviction around potential INR appreciation could accelerate allocations.

Q) Could increased FPI participation in government securities provide structural support to the rupee?

A) FPI inflows into government bonds alone may not be sufficient to support the INR, especially if equity outflows persist. Sustained net inflows across both debt and equity are more likely to improve sentiment and provide currency with some support.

Q) What kind of debt inflows could India attract over the next 12-24 months because of these changes?

A) India could attract up to $20–25 billion in incremental debt inflows over 12–24 months, driven by potential index inclusion and improved access for FPIs. However, actual flows will remain contingent on global conditions and investor risk appetite.

Analyst Disclaimer - Dhawal Dalal, is the President & CIO-Fixed Income at Edelweiss Asset Management Limited (EAML) and the views expressed above are his own.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Edelweiss Mutual Fund- SEBI Registration No. MF/057/08/02

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