The Reserve Bank of India has increased bond-trading targets for primary dealers by 48% to enhance liquidity in India's debt markets. According to The Hindu BusinessLine, each of the 21 primary dealers must trade at least ₹4 lakh crore ($41.8 billion) of bonds in the financial year starting April, up from last year's target. The RBI notified primary dealers of these targets in writing, with the move underscoring the central bank's push to deepen liquidity in sovereign debt. Daily trading volumes in the 10-year bond — the nation's most liquid debt security — jumped 40% since April compared with March, while total bond trading rose 15% over the same period, as reported by Bloomberg.
The Indian government is considering reducing taxes on foreign bond investments as part of broader efforts to attract more international capital into the country's debt markets. According to reports from Bloomberg News, The Economic Times, The Hindu BusinessLine, NDTV, Business Standard, The Times of India, and latest sources, this potential policy change represents a significant shift in India's approach to foreign investment in government securities, with the move recommended by the Reserve Bank of India and being considered seriously by the country's Finance Ministry. Deliberations to ease the tax burden have gathered pace as authorities try to curb the rupee's depreciation, with the Finance Ministry and the Reserve Bank of India not responding to emails seeking comment on the matter. The RBI did not immediately respond to a request for comment on the latest developments, with discussions remaining private as reported by people familiar with the matter.
The proposed tax reduction on foreign bond investments has triggered immediate market recovery, with the Nifty 50 surging over 300 points in 60 minutes to cross the 23,700 mark intraday before the report was officially released. As reported by CNBC TV18, banking stocks led the recovery, with HDFC Bank being the top contributor to the market surge. The recovery has also been seen in PSU Banks led by Bank of Baroda, Indian Bank and Bank of India, demonstrating broad-based investor confidence in the policy announcement. PNB Gilts shares zoomed 19.9% to ₹83 on the BSE, with volumes increasing to 3,99,000 compared to a two-week average of 15,000, while at 1:20 PM, PNB Gilt shares were up 15.13% as against a 1.2% rise in the benchmark Sensex index. The rupee has been Asia's worst currency performer so far in 2026, down over 6% against the dollar, making this tax policy particularly timely for currency stabilization efforts.
The tax policy announcement has provided immediate relief to the rupee, which weakened to a record low of 95.9575 per U.S. dollar during Thursday's session, last at 95.7150. According to CNBC TV18 and The Times of India, the rupee recovered from earlier losses following reports of the discussions, while bond prices strengthened significantly. The yield on the benchmark 10-year government bond declined 2 basis points to 7.03% after Bloomberg's report, reflecting improved market sentiment around the policy development. The 10-year yield fell as much as five basis points to 7% following the latest developments, with bond markets showing strong positive response to the tax reduction prospects. Yields on the 10-year Government securities eased 0.8% to test the 7% mark following the latest developments. The currency's weakness has been attributed to policymakers taking defensive steps such as limiting the size of trading positions to stem the slide.
Currently, overseas buyers pay both short-term and long-term capital gains taxes depending on their jurisdiction, while interest income on coupon payments is taxed at around 20%. As reported by CNBC TV18, The Hindu BusinessLine, NDTV, Business Standard, and The Times of India, foreign investors used to pay just a 5% tax on interest earned, but that dispensation ended in 2023. The proposed policy change would restore this more favorable tax treatment for foreign investors in India's debt markets. Foreign investors have been vocal about the high level of taxes they face in India, compared with other emerging markets like Indonesia, Malaysia, Mexico and South Africa. Despite this, foreigners hold just 3% of the $1.3 trillion market, despite Indian government bonds being included in widely followed indexes like those from JPMorgan Chase & Co. and FTSE Russell. India has agreements with dozens of countries that allow certain investors to avail lower tax rates, and the move is aimed at attracting inflows and stabilizing the rupee amid economic challenges.
Longer term, aligning taxation policies with global markets is seen as helping Prime Minister Narendra Modi achieve his goal of making India a developed nation by 2047. According to The Hindu BusinessLine, Business Standard, and The Times of India, policymakers are looking to bring the country's framework closer to international standards and encourage greater capital inflows. The policy consideration comes as authorities seek to align policies with global norms and attract inflows to help fund a larger import bill as the Iran war raises oil prices, making this tax reduction particularly strategic for India's economic stability and development goals. If implemented, stronger foreign demand for Indian bonds could help lower government borrowing costs, with yields generally declining when demand rises, easing financing conditions for the government as well as corporations. Improved foreign inflows may also support the rupee by increasing dollar inflows into the country. Market veteran Deepak Shenoy has backed reports that India may consider removing taxes on foreign institutional investors (FIIs) investing in Indian bonds, calling the move an important step toward making Indian debt markets more globally competitive and attracting long-term foreign capital.
