Under the India-Pakistan conflict, foreign banks have recorded a massive sell-off of Indian government bonds.
According to data from the Clearing Corp. of India Ltd., foreign banks net sold ₹106.3 billion (approximately $1.2 billion) of Indian government bonds on Thursday, marking the highest single-day sell-off since records began in 2006.
Despite the Reserve Bank of India (RBI) expected to cut interest rates, India's appeal as a &#34;relatively safe&#34; emerging market asset is being challenged by border tensions. Nagaraj Kulkarni, co-head of Asian rates at Standard Chartered Bank, stated:
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&#34;While India's macro fundamentals support Indian government bonds, recent market sentiment and capital flows will depend on the developments in the India-Pakistan situation.&#34;
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Nevertheless, the bank maintains its recommendation to buy five-year Indian government bonds.
<h2>Short-term volatility in stock and bond markets intensifies, will the central bank &#34;intervene&#34;?</h2>
According to CCTV News, on May 8 local time, the Pakistan Inter-Services Public Relations reported that since India launched &#34;Operation Red Sand,&#34; Pakistan has shot down over 25 Indian &#34;Harop&#34; drones.
Due to geopolitical tensions, Indian stock and bond markets have declined for the second consecutive day. Since the central bank cut interest rates in February, the benchmark 10-year government bond yield has fallen by nearly 30 basis points but rebounded by about 9 basis points in two days.
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The rupee remained largely stable after experiencing its largest drop since 2022 on Thursday.
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Notably, while foreign capital has significantly sold off Indian bonds, domestic banks in India are still buying, with most operations serving client accounts or their own trading books, and there has not yet been a large-scale outflow of dollars. In fact, since the escalation of the conflict, foreign net sales of Indian bonds have only amounted to about ₹1 billion ($1.17 million), which is insufficient to trigger a severe capital outflow crisis.
Recently, the RBI's infusion of capital and interest rate cuts had pushed Indian bond yields higher, but the current situation is reversing this trend. Analysts believe that looking back at similar past events, the impact of border conflicts on the Indian market is usually short-lived.
Kaushik Das, chief Indian economist at Deutsche Bank in Mumbai, wrote in a report that the conflict may increase risk premiums, but the situation is unlikely to spiral out of control. He expects that &#34;the central bank will intervene to control market volatility.&#34;
According to informed media sources, the RBI does not anticipate significant fluctuations in the rupee exchange rate but is prepared to use foreign exchange reserves to maintain currency stability in the event of escalating India-Pakistan tensions
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The India-Pakistan conflict triggers panic, foreign banks sell off a record amount of Indian government bonds

- Foreign banks sold a record 106.3 billion rupees (approximately 1.2 billion USD) of Indian government bonds amid escalating India-Pakistan tensions, marking the highest single-day sell-off since 2006.  
- Despite the Reserve Bank of India's anticipated interest rate cuts, the appeal of Indian assets is challenged by geopolitical instability, although local banks continue to buy bonds, mitigating significant capital outflows.  
- Analysts suggest that while the conflict may increase risk premiums, its impact on the Indian market is likely to be short-term, with expectations of central bank intervention to stabilize the situation.