RBI dollar-inflow plan: FPI tax relief from April 2026

Why the RBI and government moved together

India has announced a coordinated set of measures aimed at pulling more dollars into the country and easing pressure on the rupee. The Reserve Bank of India (RBI) kept the repo rate unchanged while unveiling a package spanning bonds, foreign-exchange swaps, and deposit measures. Alongside the central bank’s steps, the government moved to change the tax treatment for foreign investors in government securities. Market participants have linked the urgency to costly oil and foreign outflows in the wake of the Iran war.

Siddhartha Khemka of Motilal Oswal said the government’s proposed tax relief measures for foreign investors could ease pressure on the currency and improve market sentiment. Separately, the government also signalled that an ordinance would provide leeway on long-term capital gains and withholding tax for foreign institutional investors.

Tax changes for foreign investors in government securities

A key plank is the exemption for foreign investors from tax on interest income and capital gains earned from government securities. The change is effective retrospectively from April 1, 2026, according to a gazette notification dated June 5 that amended the Income Tax Act. The intent, as stated in the reporting, is to attract overseas capital and support the rupee.

The measures remove two specific tax burdens referenced in the information provided: foreign investors will no longer have to pay the 12.5% capital gains tax on government securities, and interest income on these securities has also been exempted from the earlier 20% withholding tax. In the broader context, foreign investors are subject to a 12.5% long-term capital gains tax on listed shares and bonds held for more than 12 months.

Bond market opening: Fully Accessible Route (FAR) expanded

The RBI said all new issuances of 15-year, 30-year, and 40-year government securities will now be included under the Fully Accessible Route (FAR). This expands the list of “specified securities” under FAR, increasing the set of bonds that can be accessed by foreign investors without certain limits.

In addition, the RBI announced that investment limits on other government securities will be removed, further opening up the sovereign bond market to foreign capital. Governor Sanjay Malhotra said limits pertaining to short-term investment, concentration, and individual securities on FPI investment under the General Route are being removed.

Equity access: higher limits for NRIs, OCIs, and others

To broaden foreign participation beyond bonds, the RBI expanded investment opportunities for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs). It raised investment limits for NRIs and OCIs in listed equity instruments without requiring registration with the securities regulator.

The same facility is also being extended to all individual Persons Resident Outside India (PROIs) at par with NRIs and OCIs, according to the details provided. This is intended to widen the investor pool that can access listed equity instruments under simpler compliance requirements.

Dollar inflow levers: swaps, deposits, and ECBs

The RBI announced a concessional foreign-exchange swap facility that will remain available until September 30. Separately, it said concessional forex swaps until September 30 will be used to encourage state-owned firms to tap dollar borrowings, particularly via external commercial borrowings (ECBs) by public sector undertakings.

The central bank also said it will compensate banks for hedging costs on 3-year and 5-year foreign currency non-resident deposits aimed at the Indian diaspora. A similar facility for bearing the full hedging cost is being provided to authorised dealer (AD) banks for raising fresh 3–5-year FCNR (B) deposits.

Export proceeds timeline restored to nine months

Among the operational measures, the RBI announced that it will restore the time period for realisation of export proceeds to nine months. The intent is to support timely inflows linked to trade and reduce delays in converting export earnings into foreign exchange that can support the external balance.

Market context: rupee pressure, reserves, and prior interventions

The reporting noted that the RBI has been intervening in both spot and forward markets to curb excessive depreciation pressures. Under such operations, the RBI sells dollars in the spot market while agreeing to buy them back at a future date. The mechanism is described as helping stabilise the rupee without excessively tightening banking system liquidity and reducing pressure on forward premiums and hedging costs for corporates.

Foreign exchange reserves were reported at $190.7 billion as of May 1, the lowest level in over a month, and stated to be enough to cover 10 to 11 months of imports. To curb speculation in the rupee, the RBI has also limited banks’ daily open positions to $100 million, and earlier in February and March it cut the limit for net open forex positions that banks can hold.

Import curbs and other steps to conserve foreign exchange

The government raised import tariffs on gold and silver to 15% from 6% in May by imposing a 10% basic customs duty and a 5% Agriculture Infrastructure and Development Cess (AIDC). It also tightened rules for duty-free gold imports for jewellery exports by capping imports at 100 kilograms per licence.

India also placed imports of silver bars with 99.9% purity and other semi-manufactured forms of silver under the restricted category with immediate effect. While India has not imposed restrictions on travel, Prime Minister Narendra Modi appealed to citizens to avoid unnecessary foreign travel and urged people to work from home to conserve fuel and help reduce costly oil imports. Separately, it was reported that local government staff in Delhi are working from home to save fuel and that sugar exports are temporarily banned.

Key measures at a glance

Market impact: what changes immediately, and what it signals

The combination of tax exemptions and market access changes directly lowers the cost for foreign investors to hold Indian government bonds, because both capital gains tax and tax on interest income from these securities are removed from April 1, 2026. The FAR expansion and the removal of certain General Route limits also increase the investable universe and reduce frictions for foreign participation in the sovereign bond market.

On the inflow side, the RBI’s concessional swap window until September 30 and the hedging-cost support for 3-year and 5-year diaspora deposits are designed to pull in dollars through borrowing and deposit channels. The restoration of a nine-month realisation period for export proceeds adds an additional lever tied to trade-linked inflows.

Analysis: why the measures matter for sentiment and the rupee

The measures are positioned as an alternative to rate action, with the repo rate held steady while the RBI and the government focus on increasing dollar supply and reducing outflow pressure. In the context of oil-driven external stress and reported foreign outflows after the Iran war, the package leans on policy tools that have historically been used when inflows are under pressure, including incentives for diaspora deposits and easing channels for foreign investment.

The changes also show a clear sequencing: tax relief and bond-market access changes aim to attract stable foreign capital into government securities, while time-bound swap and hedging facilities aim to improve near-term dollar availability. Khemka’s assessment that the tax relief could ease pressure on the currency and improve sentiment fits with the stated goal of attracting overseas capital and supporting the rupee.

Conclusion

India’s latest steps combine tax exemptions for foreign investors in government securities with RBI measures spanning FAR expansion, relaxed FPI limits, concessional forex swaps until September 30, and hedging support for 3–5-year FCNR (B) deposits. The changes are effective from April 1, 2026 for the tax exemptions, backed by a June 5 gazette notification. Near-term focus will remain on how quickly inflows respond to the time-bound swap and deposit measures, and how the broader set of bond-market access changes influence foreign participation.