The Reserve Bank of India has doubled investment limits for overseas individual investors under the Portfolio Investment Scheme and extended direct equity access to all Persons Resident Outside India. According to The Economic Times, the government simultaneously eliminated taxes on capital gains and interest for overseas investors in government bonds, a change set to take effect on April 1. These measures are part of an ordinance aimed at enhancing the appeal of Indian sovereign bonds and fortifying the strength of the rupee. The RBI has also kept the repo rate unchanged at 5.25 per cent while unveiling a series of measures aimed at boosting overseas inflows. The June Monetary Policy Committee meeting went well beyond a rate decision, with the RBI working in tandem with the Government of India to remove withholding tax and capital gains tax structures that had long deterred foreign portfolio investors from India's debt markets.
The latest RBI measures significantly expand foreign investment opportunities in Indian markets. As reported by The Economic Times, Public Sector Undertakings can now access concessional forex swaps for overseas borrowing until September 2026. However, bankers suggest the RBI needs to cover at least half the hedging costs for this to make borrowing abroad cheaper and viable for these companies. The enhanced access comes after the company received approval from the Securities and Exchange Board of India (Sebi) to commence mutual fund operations, marking a strategic step to lure foreign investment into Indian financial markets. The RBI has also proposed raising FCNR(B) deposit limits and allowed Central Public Sector Enterprises to raise funds via the External Commercial Borrowing route.
India's government securities market has grown to ₹123.5 trillion as of June 8, making it one of the country's most important financial markets, according to the Reserve Bank of India. However, most government borrowing is already funded by domestic investors, with commercial banks holding 34.31% of outstanding government securities, insurance companies at 25.89%, and the RBI accounting for 14.52% as of December 2025. Foreign portfolio investors held only 2.96% of outstanding government securities. As reported by Business Standard, Kumar Rajagopalan from Dexian notes that GSec sit at the heart of the financial system, with their yields serving as benchmarks for pricing loans and bonds across the economy. The government is making a fresh push to attract foreign investors by exempting them from taxes on interest income and capital gains from GSec and expanding the list of bonds eligible under the Fully Accessible Route (FAR).
Recent data suggests foreign investors are responding positively to the tax exemption measures. According to Business Standard, FPI holdings in GSec under the FAR route rose by ₹8,794.743 crore from ₹3.23 trillion on June 3 to ₹3.32 trillion on June 10, following the government's tax exemption announcement and the RBI's market-access measures. According to Edelweiss MF's Dhawal Dalal, the combined effect of these measures could meaningfully lower short-term rates by September 30, providing significant liquidity injection for banks struggling to grow deposits. The logic is straightforward: banks have been running very high credit-deposit ratios, and a surge of foreign debt capital eases that pressure, boosts deposit growth, and creates conditions for the short end of the yield curve to gradually decline. As reported by Business Standard, Suyash Choudhary from Bandhan Mutual Fund said the measures should serve to put a floor under the BoP narrative and help directly alleviate funding stress for banks.
The government's push for foreign investment in government securities serves multiple strategic purposes beyond immediate liquidity benefits. According to Business Standard, Nehal Sampat from Price Waterhouse & Co LLP notes that more foreign investment in debt will help mitigate borrowing costs, balance foreign flows vis-à-vis equity outflows and currency depreciation, and deepen debt markets. The rationale extends to India's push for inclusion in global bond indices, with Indian government bonds already entered JPMorgan's Government Bond Index-Emerging Markets in 2024 and included in FTSE Russell's Emerging Markets Government Bond Index. Policymakers are now hoping to strengthen India's case for inclusion in Bloomberg's Global Aggregate Index, with market estimates suggesting inclusion could eventually attract around $25 billion of inflows. Kumar Rajagopalan from Dexian suggests the country does not need foreign investors to dominate its government bond market, but rather a broader mix of investors that can improve liquidity and market efficiency while keeping domestic institutions at the centre, with foreign ownership of around 8-15% over the next decade striking a reasonable balance.
