As losses this month overtake Asian colleagues amid rising geopolitical tensions in the area, the risk of foreign investors in rupee bonds being captured incorrectly and further weakening India's currency is rising.
According to Samir Lodha, Chief Executive Officer of QuantArt Market Solutions, a Mumbai-based currency risk consultancy, a sharp drop in the rupee may wipe out most of the earnings for overseas investors as they generally do not cover currency risk for brief-term debt investments in the nation.
Any sell-off of Indian business and government bonds in overseas stocks can trigger a spin that further weakens the currency. The increase in incoming assets in rupee bonds was mainly fuelled by transfer trades, leading to fears of a rapid flow collision if the rupee drop is not checked.
The currency slowed more than 3.6 per cent towards this month's greenback, configuring for its second-worst monthly loss since September 2013. As India increased conflicts with Pakistan by withdrawing seven decades of Kashmir's independence.
That added to the agitation of the US-China export spat in developing economies. Mr Loda said that while the mounting bets were secure as long as the exchange remained stable, many are now wiping off their yields.
Any large-scale unravelling of overseas shareholder bond holdings is likely to cause a downward spiral to a new low for the rupee. He also said that India was a good fit for shareholders to borrow money in a cheaper currency to invest in greater interest rate economies.