In the past month, these investors sold debt of Rs 18,345 crore ($3.19 billion) and the trend is likely to continue until the rupee shows stability.
It has plunged 7.1 per cent in the past month and is near its all-time (intra-day) low of Rs 58.99.
As compared to debt, equities have witnessed lower selling pressure. Foreign investors have sold equity of only Rs 1,374 crore in June.
Global uncertainties have seen them taking a breather from buying Indian equities lately and lack of buying from domestic institutions has resulted in lacklustre markets.
Foriegn institutional investors are said to be taking a wait and watch approach, looking for cues from the Fed's meeting on Friday.
But it's the redemptions in the debt segment that has the government worried. Bond experts say the biggest factor which has driven away foreign investors has been the volatile rupee.
The cost of holding domestic bonds has increased, as foreign investors pay more towards higher hedging due to the rising foreign exchange risk.
Foreign investors also see payouts from their Indian domestic holdings shrink when the rupee falls.
Indian debt yields are higher than in other emerging markets but the high returns might not be attractive enough against a falling rupee.
Says Kaustubh Kulkarni, head of local currency debt, Standard Chartered India: “The current market dislocation is temporary and is happening due to volatility in the forex market.
The rupee movement can significantly dent a bond investor's profit.”
Emerging market bonds have seen sharp redemptions of about $4.5 billion in the past month as investors worry the liquidity provided by the US Fed through its quantitative easing could taper off.
Treasury yields in the US have increased, sparking a further exodus from emerging markets.
The difference in yields between the US 10-year Treasury and the Indian 10-year G-sec has reduced from 5.46 per cent to 5.09
Markets slump amid weak global cues, rupee weighs
ATM heist: India's IT sector in UNWELCOME spotlight
Bank RATE-RIGGING was pretty big business
Weak rupee, high inflation force RBI to hold rates
Banking licence aspirants scramble to meet RBI norms