India is the fastest-growing major economy in the world. A one-time dollar-deposit program for its diaspora has just lifted foreign-exchange reserves by 20%. The rupee is steadying and tax revenues are surging. The bond market should be the darling of investors at a time of geopolitical tension.

Instead, global money managers are souring on the country. India’s risk premium is rising at its fastest pace in seven years.

The premium investors demand to own India’s 10-year sovereign bonds over US Treasuries jumped 58 basis points in October. That was the biggest monthly increase since August 2019, when growth was slowing and the rupee was suffering its sharpest selloff in six years. The economic backdrop is almost the opposite now. Yet investors are behaving as if something has gone badly wrong.

It’s the latest evidence that markets are looking beyond the themes that have powered India’s investment case for more than two decades: economic growth and the size of the consumer market. Those remain undeniable strengths, but fund managers have been pricing them into Indian stocks and bonds for years. The nation’s leaders require a different pitch to lure the next dollar of global capital. They need to showcase economic resilience and policy credibility.

The headline economy, as reflected in official data, looks mostly stable. Look beneath it, however, and the environment experienced by businesses and consumers is far more turbulent. The most obvious pressure is imported inflation: Global oil prices have surged in the wake of the Iran war, feeding into costs across the economy. Even the reserves windfall is less comforting than it appears: The diaspora deposit program, together with currency swaps arranged in June, has left the central bank with an estimated $200 billion in forward dollar commitments, shrinking its effective cushion. But all these cannot explain the sudden market stress.

Earlier this year, as Brent crude climbed above $100 a barrel and as US Treasuries sold off, India’s risk premium was actually falling. What has changed, then, isn’t simply the risks confronting the country. It’s investors’ confidence in how policymakers are responding to them.

The Reserve Bank of India is at the center of those concerns. The question isn’t just whether it should have raised rates sooner. By the time it acted, its prolonged wait-and-watch approach may have already done the damage. The subsequent spike in India’s risk premium suggests investors are no longer convinced the central bank is ahead of events.

The paradox is that the 10-year yield is approaching 7.5% even as real policy rate hover near zero. Against the RBI’s own inflation projections, real rates could soon turn negative. Yet the central bank has offered no clear path back to its preferred real-rate range of 1.4%-1.9%. Its response to rupee volatility may have compounded the credibility problem. Days after raising rates, the RBI tightened restrictions on some currency positions, implying that speculation was partly responsible for the pressure.

But fundamental forces are pushing the rupee lower, leaving investors to wonder whether policymakers are treating the symptom rather than the disease. The restrictions have also made some hedging strategies more difficult and potentially more expensive, adding another reason for foreign investors to be wary.

Still, India’s bond-market stress isn’t solely homegrown. The Treasury selloff earlier this year was driven largely by US-specific fiscal concerns and did not trigger a broader retreat from emerging markets, including India. The second selloff, which began in late August, was different. Fears that surging fuel prices would entrench inflation and force the Federal Reserve to raise interest rates threatened tighter financing conditions worldwide. This time, the pressure spread quickly to emerging markets. That helps explain why India’s bond-risk premium, which had remained remarkably stable through the earlier Treasury selloff, ballooned in October.

The danger for buyers of Indian bonds is that this becomes a prolonged repricing. None of the global risks, including disruption to the Strait of Hormuz, looks likely to disappear quickly. Even when those pressures ease, investors may conclude that India’s dependence on imported energy and geopolitical vulnerabilities warrant a more persistent risk premium.

Higher yields and wider spreads have undoubtedly made Indian bonds more attractive on paper. Foreign investors may eventually return, but they’re likely to want stronger evidence that the RBI can get ahead of the curve.

Their wish list is long but straightforward: predictable monetary policy, credible inflation control, an accessible currency market, stable and flexible hedging mechanisms and, over the longer term, a clear road map for reducing India’s dependence on imported oil.

India has spent years selling investors on the promise of its growth. The country now needs to convince them that it can manage the risks that come with it.