Indian capital controls are proving deeply insufficient as overseas investors continue to snap up corporate bonds in the country. That exuberant demand is undermining the government's attempts at financial stability. India currently caps total foreign investments into corporate bonds at 2.44 trillion Indian rupees ($38.1 billion). When overseas buying crossed 92 percent of that quota in July, the government suspended the issuance of offshore rupee-denominated bonds until foreign holding falls back below that level. Instead of slowing down, buying enthusiasm gained more momentum: foreign ownership of Indian corporate bonds pushed past 96 percent of the allowed cap and has stayed above 99 percent for most of the last one month, according to data by the country's National Securities Depository Limited.

Data source: National Securities Depository Limited And there are no signs of stopping, given how bonds from Asia's third-largest economy provide some of the highest returns in today's investment climate, fund managers said. India has frequently been cited as an attractive emerging market for investments in both the debt and equity space by money managers such as BlackRock and Citi Private Bank. "Yes, there is still a case for adding Indian bonds," Wontae Kim, research analyst at Western Asset Management, told CNBC in an email. "India offers a mix of relatively high yields, a firm political mandate, improving fundamentals and FX stability that few markets can." The average fixed coupon rate of Indian corporate debt issued from January to July 2017 is at 7.27 percent, according to data provided by Dealogic. That is lower than Indonesia's 9.16 percent, but it exceeds other emerging markets such as Mexico, Brazil and Malaysia. That hunt for yield have led to net foreign investment inflows of 1.13 trillion rupees ($17.65 billion) into the Indian debt space from January to July 2017, compared with a net outflow of 47.24 billion rupees a year ago, data by India's National Securities Depository Limited showed.

India's central bank in a tough spot?

Coupled with an increase also seen in the equity markets, the surge in total capital inflows into India sent the rupee appreciating by 5.8 percent in the first seven months of the year and is complicating the Reserve Bank of India's task of managing its monetary policy, analysts said.

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