- US yields above 5% are giving foreign investors a stronger dollar-based alternative to Indian assets.
- Rupee weakness and hedging costs can reduce the dollar returns foreign investors earn from India.
- Taxes and rising foreign selling are adding further pressure to the return equation.
Foreign investors are increasingly finding it difficult to make investments in India as US Treasury yields rise. Although India offers strong returns, investors can gain more from US assets, which offer yields above 5%. This makes dollar-based investments more attractive, especially for investors who want to avoid the additional risks linked to emerging markets.
The situation becomes more challenging as the Indian rupee continues to weaken against the dollar. As the rupee weakens, foreign investors could see their returns decline when they convert their Indian investments back into dollars.
The India Trade That Used to Be Easier
It is important to note that foreign investors used to opt for Indian investments for higher returns. Earlier, they were ready to accept additional risks as they prioritized returns. At that time, US Treasury yields were much lower, and the investors were impressed by Indian markets’ potential returns, which could make the extra risk unimportant. In December 2021, the 10-year Treasury yield was around 1.4%, while it was around 1.8% in early 2022.
However, there is still demand for Indian assets. In August 2026, foreign investors bought $3.1 billion of Indian equities, marking the strongest monthly inflow in nearly two years.
The Dollar Alternative Has Changed
But now, the situation has changed. US yields are moving higher, and the 10-year Treasury yield has surged above 5%. This means that investors now have a stronger dollar-based alternative to Indian investments. Thus, if foreign investors need to choose Indian assets, the country should now offer a bigger return premium.
Still, investors can put money into India; the flow hasn’t completely ended. But as the gap becomes narrower, foreign investors may become more selective about where they put their capital. This could put additional pressure on Indian markets if investors move their money towards dollar-based assets.
The Hidden Cost: Hedging the Rupee
Another major aspect to consider is the weakening rupee. As the Indian currency continues to lose its value, foreign investors are facing a major challenge. Even when an Indian asset offers strong returns in rupees, the gains become less when converted back into dollars.
While investors can hedge this risk, hedging comes at a cost. According to Reuters, the one-year dollar-rupee forward implied rate rose to 3.37% on September 10. This marked the highest level since late May. As the rupee stays around ₹96 per dollar, foreign investors also have to consider possible currency losses and the cost of hedging to calculate their returns from Indian investments.
India’s Return Premium Is Getting Squeezed
Although Indian assets still offer investors higher returns, the gap between Indian assets and US investments is becoming smaller. As US Treasury yields rose, investors now have more options to invest without becoming exposed to currency risk.
This means that Indian stocks and markets should now consider offering stronger returns to compensate for the currency risk. As any fall in the rupee can reduce the investor’s returns, foreign investors may look for a higher return from Indian assets.
Already, this gap is visible through a notable surge in foreign selling. As per reports, foreign institutional investors sold around ₹29.78 billion worth of Indian equities. At the same time, domestic investors bought around ₹26.86 billion.
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Moreover, taxes further complicate this situation. Investors find their returns reduced after imposing tax. Their investment gains may be taxable, and after deducting tax, the returns may be lower than expected.
This aspect is important to consider, especially when the return gap is already narrowing. After accounting for taxes, currency movements, and hedging costs, the actual return from Indian investments could be lower than the initial figure. Thus, investors should calculate the final returns only after considering all these factors.
Related: SEBI Digital KYC for NRIs: Could Easier Access Bring More Foreign Money Into India?
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