Foreign institutional investors (FIIs) or as I like to call them naraazj fufajis (sulking uncles), have once again started sulking – and taking their money with them.

In September 2026, they net sold Indian stocks worth Rs 198.3 billion or $2.1 billion. They had net bought stocks in July and August.

What FIIs do in the stock market is typically well followed and reported, but what they do in the bond market most don’t seem to care about.

In September 2026, FIIs net sold Indian bonds or debt securities worth Rs 105.1 billion or $1.1 billion. This is the first time since April 2026 that the FIIs have sold a substantial amount of bonds. (They had sold a small amount in August too.)

Now, financial markets do not wait for things to happen. They discount possibilities.

The major reason for the FIIs selling has been the recent jump in bond yields across the rich world. The yield on the 10-year US treasury bond crossed 5% in mid-September. (At the time of writing this, it was at 4.98%.)

A treasury bond is a financial security issued by the US government to finance its fiscal deficit – the difference between what it earns and what it spends. The yield on a treasury bond is the per year return that an investor can expect if they buy the bond at that point and hold on to it until maturity.

The yields on bonds in other rich countries like Germany, United Kingdom, Japan, etc, have been on their way up too. In fact, the average 10-year bond yield of G7 countries has hit 4% – the first time since 2008. (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States, form the G7 countries.)

So, why are yields rising?
The governments in the rich countries are borrowing like never before. The Organisation for Economic Co-operation and Development, which comprises mostly rich countries, is expected to borrow $18 trillion in 2026, up from $12 trillion in 2022. The G7 countries are expected to carry out a bulk of this borrowing.

Interestingly, much of this borrowing – around $14.5 trillion – is expected to refinance existing debt – which means governments will borrow to repay debt that is maturing. Indeed, only governments can keep running a Ponzi scheme for perpetuity.

Over and above this, the continued expansion of the artificial intelligence companies – particularly, the hyperscalers – will require a huge amount of capital – and a lot of that is now being borrowed by issuing bonds.

In fact, investment bank Morgan Stanley points out that in 2025, AI companies borrowed $217 billion through debt markets. In 2026, it expects them to borrow $600 billion, having borrowed $445 billion by mid-August.

So, what does all this mean?
First, given the amount of debt the rich-world governments have taken on, they will have to take on more debt to repay the maturing debt. Of course, one way out of this is for governments to spend less and thus borrow less. But given the state of the world, that doesn’t seem to be the way forward.

Second, in order to pay a lower rate of interest on what they are borrowing, the governments are borrowing more for the short-to-medium term. In fact, the share of bonds being issued by the OECD governments with a maturity period of over 10 years has reached its lowest point since 2009. For corporations it is the lowest on record.

Third, 48% of overall borrowing in 2025 carried out by OECD governments was through treasury bills. This is close to a record high. The situation is expected to remain the same in 2026 as well. Treasury bills are financial securities issued by governments to borrow money for the short-term of less than one-year.

Fourth, what this basically means is that the past government borrowing will have to be repaid faster than ever before. So, the yields on treasury bills will also go up. Now, given that financial markets discount possibilities, that's already happening.

Fifth, once the pandemic broke out, central banks around the world financed the fiscal deficits of their governments by printing money and buying their bonds. This led to central bank balance sheets burgeoning and them becoming the largest holders of government bonds in rich countries.

Many rich world central banks have been shrinking their balance sheets. They aren’t buying as many government bonds as they used to and are allowing the bonds they had bought to mature. In this scenario, the governments will become more dependent on “price-sensitive investors, including hedge funds, households and certain foreign holders”.

Such investors – unlike central banks – will demand a higher rate of return on their investments. This means higher yields on government bonds.

In a sense, this would be a return to normal, and to the way bond markets largely worked before the financial crisis broke out in 2008.

Sixth, while predicting the direction of interest rates remains a risky business, it does seem that higher rates in the rich world are here to stay.

So, what does this mean for India?
First, if higher interest rates and returns from fixed income instruments are available across the rich world, the FIIs have less reason to invest money in India.

If they can earn a higher fixed rate of return in their native countries, there is lesser incentive to invest in a market like India and take on exchange rate risk, execution risks and regulatory hurdles for companies they invest in and the risks that come with investing in an economy that remains highly energy-dependent in a world where two major wars are currently on.

Second, if the money being brought in by the FIIs dries up further or continues to remain sluggish, the pressure on the Indian rupee against the dollar and other foreign currencies will continue.

This will mean lesser returns in dollar terms for FIIs and discourage them further. The return an FII earns in rupee terms is ultimately converted back into dollars, euros, pounds or yen. If the rupee depreciates, part of that return disappears. And hedging the rupee risk costs money. So, the returns may not look quite as attractive in foreign currency terms.

Third, if India wants to keep the interest-rate differential with the rich world attractive enough to draw FII money, the Reserve Bank of India will have to raise interest rates. (Of course, higher domestic inflation is a reason on its own.)

This might have some impact on the huge jump in the non-housing retail loans which have played an important role in driving consumption growth over the last few years.

Fourth, if the AI bubble bursts, the naraaz fufajis – aka FIIs – are likely to invest more in Indian stocks. Or so we are being sold.

Nonetheless, it needs to be remembered that if the AI bubble bursts, stock markets around the world will be in trouble, given that AI stocks have primarily been driving stock markets higher.

Also, the AI bubble bursting won’t end India’s structural challenges, one being the fact that the country level economic growth hasn’t really translated into real income growth for many of the self-employed and the salaried.

On the flip side, a bursting AI bubble could push interest rates in the rich world somewhat lower. But as long as governments borrow as much as they currently are, the rates will remain on the higher side.

The naraaz fufajis, then, are unlikely to stop sulking anytime soon. As long as they can earn decent returns at home without taking the risks that come with investing in India, they have little reason to make up with us. And when fufajis have found a reason to stay annoyed, as we all know, they can sulk for a long time.

Of course, nephews and nieces of the fufajis – us domestic investors – can make up for some of their selling or the lack of buying. But that doesn’t mean the fufajis don’t matter. When the fufajis sulk, the rest of the family also ends up suffering every time the fufaji asks – hum se to kissi ne poocha hi nahi (no one bothered to ask me).