Foreign inflows revive India bonds after June 2026 tax cuts

Foreign investors return to Indian debt

Foreign investors have re-entered Indian debt markets after staying largely on the sidelines for months, with buying in government securities reported for eleven consecutive sessions after key rule changes. The trigger was India’s decision to exempt interest income and capital gains earned by foreign portfolio investors (FPIs) on government securities. The Reserve Bank of India (RBI) also widened the set of bonds available under the Fully Accessible Route (FAR), which helped improve the investable universe. Since June 4, foreign institutional investors (FIIs) bought about $1.68 billion of Indian debt, signalling a clear shift from earlier muted participation. Separate flow data also indicated overseas inflows into index-eligible bonds rose by 322.8 billion rupees ($1.4 billion) after the June 5 reforms, though part of that rise reflected additional bonds being added to the eligible set. Together, the policy change and broader market access have strengthened post-tax returns and improved liquidity for global investors.

What changed on June 5

On June 5, the government and the RBI announced a set of measures aimed at attracting foreign debt inflows. The package included tax exemptions for foreigners’ investment in government securities, along with incentives designed to draw more foreign currency into the financial system. The RBI also moved to bear the full hedging cost for banks raising Foreign Currency Non-Resident Bank (FCNR[B]) deposits and to subsidise hedging costs for external commercial borrowings (ECBs) raised by public sector enterprises. These steps were positioned as flow-focused, targeting segments that were described as about 85 billion of foreign debt (PSUs and FCNR(B) deposits) and 38 billion of government securities. Reports also linked the broader push to a tougher external environment, including higher oil prices, supply chain disruptions, and global uncertainty.

Tax relief that lifted post-tax returns

The government removed capital gains tax and withholding tax on interest income for FPIs investing in government securities. One report said the June 5 ordinance amended the Income Tax Act by scrapping a 20% withholding tax on interest income from G-secs and the 12.5% long-term capital gains tax on bond gains held by FPIs. The same report said both exemptions were made effective retroactively from April 1, 2026. Another report on the same set of measures said the exemption applied retrospectively from April 1, 2025, highlighting a discrepancy across published accounts even as the direction of policy was consistent. The ordinance also extended tax exemption to the Bank for International Settlements (BIS), subject to prescribed disclosure requirements. For global funds, the practical outcome is clearer post-tax economics on Indian sovereign debt relative to the pre-reform regime.

RBI expands FAR to longer maturities

Alongside the tax changes, the RBI expanded the Fully Accessible Route, which allows foreign investors to buy specified Indian government bonds without restrictions. FAR was expanded to cover all new issuances of 15-year, 30-year, and 40-year G-secs. Previously, FAR eligibility was capped at 10-year tenors, and one report noted that long-duration global passive funds had no eligible instruments in India’s debt market under that structure. The RBI also removed concentration limits and short-term investment restrictions for FPIs on the General Route. By adding longer-dated securities and easing limits, the RBI effectively widened the investable universe and supported secondary market liquidity, two factors that matter to global investors assessing entry and exit costs.

Hedging incentives: FCNR(B) deposits and ECB support

The broader package also focused on hedging costs, which can meaningfully shape foreign appetite for rupee assets. Under the FCNR-B-related measures described in the reports, the RBI absorbs the hedging costs, aiming to improve returns to foreign depositors and to bring foreign currency into India quickly. The scheme was stated to run until September 30. For offshore borrowing, the central bank said it would subsidise hedging costs for non-resident deposits and offshore borrowings by companies, and separately noted subsidised hedging costs for ECBs raised by public sector enterprises. These steps lower the cost of protecting FX risk, a key friction for overseas investors and borrowers during periods of currency volatility.

Evidence in the flows: a sharp reversal

The change in policy quickly showed up in flow numbers reported across sources. Since the June 5 reforms, overseas flows into index-eligible bonds were reported to have increased by 322.8 billion rupees ($1.4 billion). In another data point, foreign investors were reported to have poured nearly ₹10,000 crore into Indian bonds over four trading sessions, reversing weeks of persistent selling. Market participants also cited CCIL data showing purchases of nearly 10,000 crore of Indian bonds over the past four trading sessions following the tax and FAR changes. A separate report quantified inflows at ₹11,026.331 crore over four days under FAR. One international report added that over $1 billion of government debt was acquired within just three trading sessions after the measures, compared with $1.6 billion purchased year-to-date before the announcement.

Bond yields ease; rupee stabilisation in focus

The renewed buying interest coincided with a decline in government bond yields. The benchmark 10-year yield fell 0.10% over four days, according to the reports, with the decline attributed to heavy FPI inflows after the tax relief measures. Another report explicitly linked stronger inflows to stabilising the rupee, an outcome policymakers often seek when external conditions are uncertain. Lower yields can also reflect improved demand for sovereign paper, particularly when new investor categories gain access to longer maturities. While the reports did not attribute the move to a single factor, they repeatedly pointed to policy support and expanded accessibility as the immediate catalysts.

Why these reforms matter for index inclusion

Beyond short-term flows, the measures are being framed as supportive of India’s case for inclusion in global bond indices. The logic is straightforward: tax clarity, broader eligible bonds, and eased ownership constraints can make Indian government securities more workable for large global funds that track indices. One report noted that the reforms expanded the variety of securities available without investment caps and made it easier for non-residents, including the Indian diaspora, to invest under simpler rules. The same set of changes also removed limits on how much any single foreign investor can buy for certain FAR-eligible bonds, improving operational feasibility for large allocators.

Analyst estimates: how much money could move

Some reports cited sizeable estimates for potential inflows. The RBI’s latest inflow-focused measures could potentially bring $10-75 billion into India, according to analyst estimates referenced in the article text. An Ecowrap report from SBI’s Economic Research Department said the measures were likely to help India attract USD 55-65 billion in inflows in the current fiscal, stabilise the rupee, and push the balance of payments into surplus. These figures are estimates, not confirmed outcomes, but they underscore why the bond market is treating the June measures as structurally meaningful rather than cosmetic.

Key facts at a glance

What investors will watch next

Investors will track how quickly the expanded FAR issuance pipeline develops, especially for longer-dated securities where foreign demand may be structurally higher. Another near-term monitorable is the duration and utilisation of the FCNR(B)-linked support, with the scheme stated to run until September 30. Market participants will also watch whether the stronger FPI participation sustains beyond the initial post-reform window and whether index-related allocations accelerate further as more bonds become eligible. Finally, bond traders will look for confirmation in subsequent CCIL and depository data to assess whether inflows remain concentrated in FAR-eligible lines or broaden across the curve.

Conclusion

India’s June policy package has materially improved the mechanics and economics for foreign participation in government bonds by removing key taxes and widening FAR to longer maturities. The immediate result has been a visible reversal in flows and a modest easing in benchmark yields, alongside a stated policy aim of supporting the rupee. With estimates of potential inflows ranging from $10-75 billion and USD 55-65 billion in the current fiscal cited in reports, the next few months will be judged by the durability of flows and the follow-through in issuance and eligibility under FAR.