MUMBAI, June 2 (Reuters) - Foreign investors sold Indian

government bonds included in global indexes for a second

straight month in May, driven by profit-taking and currency

volatility rather than a change in sentiment towards the

country, several investors said.

Foreign investors offloaded 123.2 billion rupees ($1.44

billion) of Indian bonds under the Fully Accessible Route in

May, the highest since its 2020 launch, after selling 111.4

billion rupees in April.

They have invested 1.20 trillion rupees in Indian bonds till

March since June 2024, when Indian bonds were included in the

JPMorgan ( JPM ) emerging debt market index.

"The recent outflows are best viewed through the lens of

profit-taking after a strong run, rather than a shift in

fundamental conviction," said Rong Ren Goh, portfolio manager at

Eastspring Investments, which manages $256 billion of assets.

Some headwinds, including geopolitical tensions and

uncertainty over the new RBI governor's stance on FX policy, may

have also led investors to trim exposure and rebalance

portfolios, he added.

The Indian rupee has grown more volatile over the past six

months since new RBI Governor Sanjay Malhotra took charge in

December, with implied volatility averaging 4.26%, up from 2.24%

during the final six months of former governor Shaktikanta Das's

tenure.

A rise in U.S. Treasury yields due to fear of a wide

budget gap and inflationary impact of President Donald Trump's

tariff policies and a drop in Indian rate due to declining

inflation have also narrowed the yield differential between the

two markets.

The spread between Indian and U.S. bond yields have

collapsed to 21-year low of around 170 bps now, from 250 bps

early November.

"This (selling in Indian bonds) was not driven by skepticism

towards India, but rather by shifts in global macro sentiment,"

Jean-Charles Sambor, head of emerging markets debt at TT

International Asset Management said, that manages $3.15 billion

of assets across EM.

"We do not see this (outflows) as a game changer. Sentiment

towards Indian bonds is likely to improve as inflation continues

to decline and there is more fiscal space," Sambor said, adding

he remains constructive on rupee bonds and believes appetite for

local currency bonds is returning.

($1 = 85.3790 Indian rupees)