Inadequate sleep has been shown to be detrimental to several body systems, including the bone. We proposed to study the impact of insomnia on bone health in Indian postmenopausal women. In a 2-year prospective study, ambulant community-dwelling postmenopausal women aged >50 years were recruited through simple random sampling. Sleep duration was recorded based on self-reported sleep duration and sleep quality using the Women's Health Initiative Insomnia Rating Scale (WHIIRS). Anthropometry, bone biochemistry including bone turnover markers (C-terminal telopeptide of type 1 collagen [CTX], N-terminal telopeptide of type 1 pro-collagen [P1NP]), bone mineral density (BMD), and trabecular bone score (TBS) were assessed at baseline and at the end of 2 years. Among 190 postmenopausal women with mean (SD) age of 58.2 (6.9) years, 65/190 (34.2%) had insomnia (WHIIRS ≥ 9) and 20/190 (10.5%) developed osteoporosis at any site on follow-up. The percentage decline over 2 years in BMD in women with insomnia was significantly (p < 0.001) higher at femoral neck (2.9 [1.6] versus 1.2 [1.2]%) and lumbar spine (4.5 [2.0] versus 1.6 [1.1]%). The decrement in TBS was also significantly higher (p < 0.001) in women with suboptimal sleep (1.5 [2.1] versus 0.5 [1.0] %) when compared with those with adequate sleep. The increment in CTX (46.4 [32.2] versus 18.9 [26.4]) and decrement in P1NP (35.4 [9.1] versus 16.7 [18.9]), respectively, were also greater (p < 0.001) in women with insomnia compared with those without. On multivariate analysis, insomnia was the sole factor that was predictive (adjusted odds ratio [OR] = 9.3;​ 95% confidence interval [CI] 2.9–29.6;​ p < 0.001) of incident osteoporosis. In conclusion, poor sleep quality was associated with incident osteoporosis in Indian postmenopausal women. Optimal sleep may help to retard ongoing bone loss that results from sleep deprivation and requires further research.