Is it true that a large FII fund manager is cutting take in Indian government debt due to worries over Kashmir situation? Is such a fear justified?

I suppose you are referring to Western Asset Management which handles a corpus of nearly $453 billion and it is the affiliate of globally reputed foreign investor, Legg Mason. The fund has stated explicitly that it is is reducing its Indian government bond holdings because tensions around a new citizenship law and the Kashmir region cloud the economic outlook. This is normal practice because large investors tend to go cautious on the bonds issued by the government as they fear that such political risks could lead to a rating downgrade leading them to write off their bond values.

Western Asset Management is currently re-allocating some of its funds into longer-dated Malaysian and Chinese debt. However, it needs to be remembered that It has an overweight position in India bonds and this selling out could also be driven by higher inflation. Foreign holdings of Indian sovereign debt have already dropped to a three-month low. Across India, there are angry protests against the Citizenship Bill land the National Registry of Citizens. Additionally, there is tension in Kashmir, which is the only Muslim-majority state in India. One of the concerns that debt investors had is that despite 5 interest-rate cuts worth 135 bps last year to shore up growth yields on 10-year India bonds remain among the highest in Asia at 6.64%. This could be attributed to inflation risks as was proved by the December inflation numbers coming in at 7.35%. It also looks like the RBI will most likely refrain from cutting interest rates in the coming months, and that along with the deteriorating macro environment, is perhaps the reason why global funds are turning away from Indian bonds. Most of these global investors did invest in India due to its high real interest rates but that is not a reality any longer.