The government's tax reforms have already shown immediate market impact, with bond yields on benchmark 10-year government securities softening to 6.98% on Friday, down from 7% following the announcement of foreign portfolio investor tax exemptions. According to The Times of India, bonds rallied after the government and RBI announced measures to encourage foreign investment in government securities on Friday. As per Ramkamal Samanta, chief investment officer at Star Union Dai-ichi Life Insurance, the abolition of LTCG tax and removal of withholding tax on interest income for FPI investments in G-Secs, along with the inclusion of 15-, 30- and 40-year papers through the Fully Accessible Route (FAR) securities universe with no investment limit are positive for the Indian fixed income market over medium term. The decisions are aimed at attracting more foreign flows through major index inclusion channels, though Samanta noted that in the near term, the market is likely to be influenced more by global yield movements and domestic inflation dynamics. The latest market data shows FIIs remained net sellers with outflows of ₹31,114 crore during the week, while DIIs continued to absorb the supply with investments of ₹33,933 crore, demonstrating the continued ability of domestic investors to offset foreign selling pressure.
India plans to make a renewed pitch for inclusion of its sovereign debt in major global bond gauges, including the Bloomberg Global Aggregate Index, following the implementation of significant tax exemptions and expansion of the investable securities pool. According to The Economic Times, Reserve Bank of India (RBI) and finance ministry officials may also reach out to the Basel-based Bank for International Settlements (BIS) for talks, with BIS having been given a special tax-exempt status in the latest rejig. India was being evaluated for a potential weight of around 1 per cent in the Bloomberg Global Aggregate Index, an allocation that could have translated into $25 billion of inflows, spread over roughly 10 months, starting from April 2027. In January, independent benchmark administrator Bloomberg Services Index Ltd (BISL) had deferred the decision to include Indian government bonds in its global index, citing the need for further assessment of operational and market infrastructure issues. The effective post-tax yield on Indian government bonds was seen as lagging relative to comparable bonds in peer emerging markets, many of which are already index constituents. Terming the tax exemptions significant, analysts at Barclays said this will improve the attractiveness of India's real yields and relative carry over peers. As per Gaura Sen Gupta, chief economist at IDFC First Bank, the chances of index inclusion have improved following the removal of tax on government securities for FPIs, which enhances ease of compliance. Former SEBI Whole-Time Member Ananth Narayan believes the reforms could eventually bring passive inflows of $25-30 billion, apart from attracting investments from global pension funds, insurance companies and sovereign wealth funds.
The reforms have significantly expanded the investable pool of long-dated securities, with G-secs in tenors of 15-, 30- and 40 years, as well as sovereign green bonds, added to the list of specified securities under the fully accessible route for FPIs investments. According to The Economic Times, the facility was only available for papers with tenors of up to 10 years earlier. Parul Mittal Sinha, head of markets (India and South Asia), Standard Chartered Bank, expects these measures to make investing in Indian government bonds compelling for foreign investors and significantly strengthen the case for Bloomberg Global Aggregate Index inclusion, especially if these bonds are made eligible for Euroclear settlement. "We expect incremental inflows of approximately $5 billion in Indian government bonds from FPIs in the immediate future in response to these announcements, aided by tax exemptions and expectations of improved performance of the rupee versus other Asian currencies," Sinha noted. India has been a part of the JP Morgan Global Bond Index-Emerging Markets from June 2024, Bloomberg's EM Local Currency Government Index from January 2025, and the FTSE Russell Emerging Market Index since last September, but Bloomberg's Global Aggregate Bond Index deferred its decision in January citing infrastructure bottlenecks related to trading workflows and complex fund registration processes.
The government has issued an Ordinance exempting foreign portfolio investors from capital gains tax on Indian government securities, marking a significant policy shift aimed at attracting overseas capital. According to The Hindu BusinessLine, the Income Tax Amendment Ordinance, 2026 was promulgated on Friday, scrapping the 12.5% long-term capital gains tax and the 20% withholding tax on interest income for FPIs in government securities from April 1. As per PTI, the gazette notification dated June 5 confirmed that the ordinance was necessary as Parliament was not in session and immediate action was required, invoking the President's ordinance-making powers under Article 123 of the Constitution. This well-timed and proactive step addresses longstanding concerns among global investors, as India was one of the few markets that taxes non-residents on sovereign debt flows. Pabitro Mukherjee from Bajaj Broking noted that "simultaneously, investor confidence was significantly boosted by the government's decision to exempt Foreign Institutional Investors (FIIs) from capital gains tax on interest earned from government securities." The reform removes the previous 12.5% long-term capital gains tax on listed securities and 20% withholding tax on interest income from government securities, making Indian government securities more competitive relative to other emerging market debt markets. Former SEBI Whole-Time Member Ananth Narayan described the tax change as "the most important announcement from a long-term policy perspective" that removes a major irritant for overseas investors who often faced practical difficulties in claiming tax benefits under double taxation treaties.
The Reserve Bank of India has complemented these tax reforms with comprehensive regulatory modifications. As reported by PTI, RBI Governor Sanjay Malhotra announced measures to deepen foreign participation in India's bond market, expanding the Fully Accessible Route (FAR) to include new issuances of 15-year, 30-year and 40-year government bonds, making a larger pool of sovereign debt available to overseas investors without investment limits. The central bank also enhanced investment limits for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) investing in Indian equity markets without SEBI registration and proposed extending similar benefits to all individual Persons Resident Outside India (PROIs). According to The Hindu BusinessLine, Kaustubh Gupta from Aditya Birla Sun Life AMC noted that the RBI has expanded the FAR universe to include 15, 30 and 40-year government bonds against the limit of 30% of outstanding investment. Basant Bafna from Mirae Asset Investment Managers emphasized that FPIs see taxation as a direct drag on returns, especially in the background of the recent currency depreciation and elevated global yields, but by addressing the taxation aspect, the government has brought the Indian G-Sec market on par with other emerging markets. Restrictions relating to short-term investments, concentration limits and security-wise caps applicable to FPI investments in government securities under the General Route have been removed, though the overall investment ceiling of 6 per cent of outstanding Central Government securities and 2 per cent of State Government Securities will remain in place. Alongside these measures, both experts highlighted the Reserve Bank of India's recent measures to support foreign currency deposits and improve confidence in the rupee, with S Naren from ICICI Prudential MF noting these steps are aimed at "breaking the negative cycle around expectations of rupee depreciation."
The tax reforms are expected to provide significant support for rupee stability, which has depreciated around 10% in the last one year and hit a record low of 96.83 a dollar on May 20. According to Business Standard, the rupee settled at 94.94 per dollar on Friday, rising by almost a per cent (its highest single day gain in two months) after the Reserve Bank of India (RBI) announced measures to attract foreign flows. Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India noted that these measures can make India's case for inclusion in larger Global Bond indices stronger, ensuring more FPI demand for G-secs, lower long-end yields, lower government borrowing cost, better liquidity in long-tenor bonds, and some support for Rupee. Foreign investor participation in the debt market has shown signs of recovery in the current financial year, with FPIs net bought ₹5,262 crore worth of government securities under the FAR route in April and ₹5,512 crore in May, followed by inflows of ₹3,395 crore this month, as of June 5. Economists at QuantEco Research reckoned that liquidity from scheduled G-sec redemptions, the record high RBI dividend, and the likelihood of a short-term boost from foreign debt inflows could keep liquidity conditions comfortable with sentiment remaining broadly supportive. Looking ahead, going into the new week, the sustainability of domestic inflows and any signs of moderation in FII selling will be critical factors to watch, as reported by market analysts. Former SEBI Whole-Time Member Ananth Narayan cautioned that "the steps which have been announced on the fifth, first on taxation, this is a medium-term correction which had to happen" and noted that the measures are primarily intended to create the right conditions for investment over time rather than open the floodgates overnight, while S Naren pointed out that India now competes in a very different global bond market environment where rising yields in the US and Japan mean foreign investors have more options than they did a decade ago.
