India's stable exchange rate has been a key factor boosting foreign flows into its government bond market, and such investments are expected to persist as the South Asian country's debt gets added to global indexes.

Foreign portfolio investors have raised their holdings of Indian government bonds by nearly 50% since Sept. 21, when JPMorgan said it will add India to its emerging market index.

Overseas investors have bought around 815 billion rupees (about $9.9 billion) of Indian government bonds since the announcement, and sentiment was also aided when Bloomberg Index Services said last week it will include the bonds from 2025.

The Indian rupee has largely been rangebound, with its volatility falling to the lowest in nearly two decades in 2023. So far this year, the rupee is the best performing Asian currency.

"The major reason other fixed income emerging markets cannot do that well is because currency volatility is too high," Kenneth Akintewe, head of Asian sovereign debt at Singapore-based abrdn, said.

"You can get a 12%-14% yield but then it gets wiped out by 20% depreciation of currency. When you look at the returns the market is generating and you adjust for risk, India is way ahead," he said. The fund house has an exposure of around $500 million to Indian government bonds.

Foreign banks and investment managers have led Indian bond purchases in the last five months, adding 216 billion rupees and 149 billion rupees, respectively, data from National Securities Depository showed.

Meanwhile, bond holdings of global central banks have risen by 78 billion rupees, while that of sovereign wealth funds are up 61 billion rupees, data showed.

"They are looking at the returns post hedging. The stability of currency gives you the potential to generate higher returns," Neeraj Seth, chief investment officer and head of APAC fundamental fixed income at BlackRock, said.

A stable currency allows investors to use different hedging tools instead of just non-deliverable forwards, Seth said.

Wontae Kim, a research analyst at Western Asset Management, said apart from the rupee's stability, macro fundamentals and lack of political risks ensure that "stars are kind of aligning for India".

"We feel that it is a great time to go into government bonds and we have been overweight duration for quite a bit," Kim said. Exposure to Indian debt across Western Asset's funds stands at around $330 million.

($1 = 82.7470 Indian rupees)

(Reporting by Dharamraj Dhutia and Ankur Banerjee; Editing by Swati Bhat and Mrigank Dhaniwala)