India’s foreign exchange restrictions have increased costs and complexity for overseas investors hedging against rupee fluctuations, negatively impacting Indian bonds. A war-related decline in earnings prospects is also pressuring equities. One-year hedging costs in the onshore market have risen by about 30 basis points, while offshore NDF hedging costs have climbed nearly 70 basis points.
Liquidity in the NDF market has thinned, making hedging more expensive and difficult. Matthew Kok, a portfolio manager at Eastspring Investments, noted that high hedging costs diminish returns from Indian government bonds. Since the war began on February 28, foreign investors have sold about 211 billion rupees ($2.26 billion) of Indian government debt, with sales accelerating after the FX curbs were announced.
Equity investors have sold about $38 billion of Indian shares since the start of 2025, with foreign outflows from equities reaching a record $12.7 billion in March. Goldman Sachs has lowered its earnings growth forecast for India by a cumulative 9 percentage points over the next two years.
