After betting strongly on Indian bonds last year, foreign investors are cutting their holdings as a tumbling rupee erodes their returns and economic risks cloud the outlook of a once-hot emerging market play.

With only three trading sessions left in March, foreign investors have sold a net $1.12 billion in Indian debt, the strongest monthly outflow since December 2016, and are now on the verge of turning net sellers for the year so far.

Overseas investors had previously proven remarkably resilient, helping support debt markets at a time when tumbling bond prices had spooked domestic players, with the benchmark 10-year yield up around 110 basis points since the end of July.

But a near 2 percent fall in the rupee this year is now starting to erode returns for foreign investors at a time when emerging markets continue to lose favour as rising US interest rates narrow the yield differentials.

More problematically for India, foreign investors say outflows also reflect rising economic concerns.

Chief among those concerns is inflation, which has stayed above the Reserve Bank of India's 4 percent target for five consecutive months, feeding fears the central bank could hike its policy rate as early as this year.

Rising energy prices are widening India's trade and current account deficits, while the government has also loosened its fiscal deficit targets to finance increased spending ahead of general elections due by 2019.

Ashley Perrott, head of pan-Asia fixed income at UBS Asset Management in Singapore, is one cautious foreign investor holding back from adding investments.