The Indian government and the Securities and Exchange Board of India (Sebi) have started discussions with foreign portfolio investors (FPIs) as part of efforts to attract overseas capital back into domestic markets. According to a report by Moneycontrol, officials from multiple ministries, along with market regulators, have been meeting select large FPIs, custodian banks and consultants to understand concerns related to taxation, compliance requirements and regulatory processes. The meetings are being attended by representatives of major global investment firms, with a large US-based asset manager leading the industry delegation. The government is seeking suggestions on simplifying regulations and improving the investment environment for foreign funds. These discussions come at a time when Indian equities have faced pressure due to aggressive selling by foreign investors, with total foreign outflows from Indian markets in 2026 remaining high at nearly ₹2.4 lakh crore, according to depository data, despite FPIs purchasing shares worth around ₹30,000 crore over the past two months.
Foreign investment flows into Indian government bonds are likely to remain muted in the near term despite the removal of taxes on overseas purchases of sovereign bonds, according to SBI Funds Management. In its Market Outlook for August 2026, the fund house stated that the tax relief by itself may not be sufficient to substantially improve foreign demand for Indian sovereign bonds. As reported by The Hindu BusinessLine, the report noted that relative yield differential and the current state of the policy cycle and INR expectations do not provide much comfort with respect to prospects of debt flows. According to SBI Funds, the relative yield differential between Indian and global bonds, combined with the current policy cycle and expectations for the rupee, does not offer enough comfort to foreign investors. The fund house expects any foreign inflows that do take place are likely to be tactical rather than structural, with currency expectations playing an important role in investment decisions.
The deferment of India's inclusion in a global bond index could also limit incremental foreign portfolio investment (FPI) in Indian bonds, according to SBI Funds. According to the report, with the index inclusion being deferred, one should anticipate muted incremental flows into Indian bonds in the near term from FPIs. The fund house expects flows if any would be tactical in nature with currency expectations possibly guiding these decisions. This means India's bond market may not see a significant foreign inflow boost from tax relief alone in the near term.
The Reserve Bank of India is anticipated to keep interest rates steady for a considerable duration, with heightened global yields providing minimal support to local interest rates, according to SBI Funds Management. Analysing the RBI's August monetary policy guidance, the report said that while the one-year-ahead consumer price inflation projection remains at 5.3 per cent and average headline inflation for FY27 is projected at 5 per cent, the central bank's reference to core inflation being around its 4 per cent target provides room to keep rates unchanged. The policy stance suggests a prolonged pause on policy rates with normalisation of policy rates likely to be pushed out further. The combination of elevated global yields, limited currency comfort, a deferred global bond-index inclusion and a prolonged domestic rate pause therefore means India's bond market may not see a significant foreign inflow boost from tax relief alone in the near term.
Global interest rates remain another challenge for foreign flows into Indian bonds, with weaker fiscal conditions and inflation remaining above target in several developed economies keeping global bond yields elevated, according to SBI Funds. The fund house noted that weaker fiscal direction as well as a prolonged period of above target inflation in most developed markets continues to support the case for higher global yields for a while longer. This environment means domestic interest rates are therefore likely to receive little support from external flows in the near term. The combination of elevated global yields, limited currency comfort, a deferred global bond-index inclusion and a prolonged domestic rate pause therefore means India's bond market may not see a significant foreign inflow boost from tax relief alone in the near term.
