Foreign portfolio investors have achieved a record inflow of ₹750 million into India's government bond market through the fully accessible route (FAR) this month, according to The Economic Times. Daily inflows have turned positive in June and are currently the highest on record in this category. This surge is attributed to comprehensive policy reforms announced on June 5, which have fundamentally transformed the investment landscape for foreign investors. Overseas flows into index-eligible bonds have increased by ₹32,630 crore ($3.5 billion) since the June 5 reforms, though part of the increase reflects the addition of more bonds to the category, as reported by The Hindu BusinessLine.
The government announced the removal of key restrictions including short-term investment limits, concentration limits, and security-wise limits for FPI investments in government securities. As reported by The Economic Times, sub-categories of investment limits were merged into single limits for central and state government securities respectively. The reforms also eliminated taxes that previously burdened foreign investors, including a 12.5% long-term capital gains tax on listed shares and bonds held over 12 months, and a 20% withholding tax on interest earned on government bonds. The tax break may boost the returns for foreigners by 15%-20%, according to Deloitte India.
Major international asset managers are actively responding to India's policy changes. Pictet Asset Management and Neuberger Berman Group LLC said they're looking to add exposure, while M&G Investments has turned more positive after the latest steps, according to The Hindu BusinessLine. "India now looks better differentiated from other emerging bond markets, where policy flexibility and credibility are more constrained," said Low Guan Yi, head of Asia fixed income at M&G Investments in Singapore. "We see scope for increased allocation as India offers a relatively high-yielding, lower-beta alternative to some other EM markets," added Carrie Liaw, senior investment manager for emerging market fixed income at Pictet.
The policy measures have significantly helped stabilize the Indian rupee, which had fallen to record lows near 97 per dollar last month amid pressure from higher energy prices and record equity market outflows. On Thursday, the currency rose for a fifth day, marking its longest winning run in a year, as reported by The Hindu BusinessLine. The central bank also announced it will subsidise hedging costs for non-resident deposits and offshore borrowings by companies, providing additional support. These measures have also boosted the prospects of eventually getting securities cleared and settled through Euroclear, making India's onshore debt market easier for foreign investors to access, according to Prashant Singh, senior portfolio manager at Neuberger.
Despite the comprehensive tax reforms, foreign investors have shown mixed response to the policy changes. FPIs withdrew more than ₹11,000 crore from central government papers and ₹1,800 crore from state government bonds between June 5 and June 16, according to Business Standard. However, FPI investments under FAR rose by around ₹27,000 crore during the same period. The government also expanded the Fully Accessible Route (FAR) to include new 15-, 30- and 40-year bonds, as well as Sovereign Green Bonds, effective from the beginning of FY27. The 40-year government bond failed to attract any FPI investment under FAR, highlighting investor preference for shorter-term securities. Not all investors are ready to consider raising exposure immediately, with Kenneth Akintewe from Aberdeen Investments noting that "heightened Middle East risks remain a hurdle for now, though will create buying opportunities over the next few months."
