Global bond yields pose challenge for emerging markets; India retains FDI confidence

Elevated global bond yields have emerged as a major challenge for emerging markets by making developed economies more attractive to international capital, but India continues to see confidence among foreign direct investors, Department of Economic Affairs Secretary Anuradha Thakur said on Sunday.

Speaking against the backdrop of heightened global economic uncertainty, Thakur said capital flows had become more challenging as investors reassessed returns across markets. Higher bond yields in developed economies can reduce the incentive to move funds into emerging markets, particularly when geopolitical and economic risks remain elevated.

Global yields a challenge

Thakur said the movement in global bond yields was a concern not only for India but for emerging economies generally. When investors can earn relatively attractive returns from assets in developed economies, emerging markets have to compete harder for international capital.

The pressure is particularly visible in portfolio flows, which can respond rapidly to changes in global interest rates, risk appetite and currency expectations.

India’s own government bond yields have risen less sharply than global yields despite higher energy prices and external pressures. The relative resilience has been linked to fiscal consolidation, domestic macroeconomic conditions and monetary policy credibility.

FDI confidence remains

Thakur drew a distinction between volatile portfolio investment and foreign direct investment, which generally represents a longer-term commitment by companies to an economy.

She said India continued to see confidence on the FDI side, indicating that global companies remained interested in the country’s long-term growth prospects despite short-term volatility in international financial markets.

FDI is particularly important because it is generally less sensitive than portfolio capital to immediate fluctuations in global interest rates. Investors establishing factories, offices, technology centres or other long-term operations typically base their decisions on factors such as market size, growth prospects, infrastructure, policy stability and availability of skilled workers.

Competition for capital

India is nevertheless operating in an increasingly competitive global environment. Developed economies are offering higher returns on financial assets, while several Asian economies are attracting investment linked to semiconductors, artificial intelligence, electronics and advanced manufacturing.

The Finance Ministry has also recently acknowledged that India faces a tougher environment for attracting global capital. Higher crude oil prices, rising global yields and uncertainty surrounding international trade have added to near-term risks.

The challenge for India is therefore to maintain its appeal to long-term investors even as short-term global capital becomes more selective.

Domestic economy resilient

India enters this period of global uncertainty with relatively strong domestic growth. Real GDP expanded 7.8 per cent in the first quarter of FY27, supported by robust activity across manufacturing and services.

Recent government assessments, however, have cautioned against taking the growth momentum for granted. External developments, particularly energy prices, global interest rates, trade disruptions and geopolitical tensions, can transmit quickly to the domestic economy through currencies, capital markets and input costs.

The rupee can also come under pressure when global investors shift towards dollar-denominated or other developed-market assets offering higher returns.

Long-term investment focus

The government’s emphasis is increasingly on attracting stable, long-duration investment rather than relying excessively on short-term portfolio flows.

India has sought to position itself as a major manufacturing and investment destination through infrastructure spending, production-linked incentives, digitalisation and efforts to improve the ease of doing business. The country’s large domestic market and expanding consumption base remain central to its pitch to international companies.

At the same time, policymakers have stressed the importance of improving competitiveness, reducing regulatory friction and strengthening state capacity to ensure that investment proposals translate into actual projects.

Navigating global uncertainty

The global environment remains difficult for emerging economies as elevated interest rates, geopolitical tensions and changing supply chains influence investment decisions. Capital is increasingly moving towards countries and sectors offering a combination of higher returns, technological opportunities and lower perceived risk.

For India, the immediate challenge will be managing volatility in portfolio flows and the currency while preserving the longer-term investment confidence reflected in FDI. Thakur’s assessment suggested that while higher global bond yields have made the competition for capital tougher, India’s underlying appeal to long-term foreign investors remains intact.