Tax concessions and easing rate expectations drive record overseas investment into India’s sovereign bond market
Foreign investment into India’s government bonds touched a record high in June after the Centre announced tax relief for overseas investors, significantly boosting the appeal of the country’s debt market.
According to data from the Clearing Corporation of India Ltd. (CCIL), foreign investors purchased ₹418 billion ($4.4 billion) worth of government securities under the Fully Accessible Route (FAR) during the month. The figure nearly doubled the previous monthly record of ₹239 billion set in August 2024.
The sharp jump follows the government’s June 5 decision to abolish taxes on capital gains and interest income earned by foreign investors on specified government bonds, removing one of the biggest hurdles to overseas participation in India’s debt market.
The addition of more securities to the FAR category also enhanced the attractiveness of Indian sovereign bonds.
Tax reforms fuel investor confidence
Economists say a combination of tax incentives, a stable rupee, expectations of steady interest rates and improving fiscal conditions encouraged foreign investors to increase exposure to Indian debt.
“The combination of tax cuts, currency stability, delayed expectations of rate hikes and receding fiscal risks provided a strong case for foreign investors to buy Indian bonds,” said Dhiraj Nim, Economist at Australia & New Zealand Banking Group.
However, he cautioned that the pace of inflows could moderate if global financial conditions tighten further or US interest rates remain elevated.
Bonds outperform as yields decline
The renewed interest comes after several months of subdued foreign participation.
India’s benchmark 10-year government bond yield declined by 25 basis points in June — its biggest monthly fall in six years — as the Reserve Bank of India maintained a relatively accommodative stance even as several Asian central banks tightened monetary policy.
RBI Governor Sanjay Malhotra recently said it was “premature” to discuss interest rate hikes, signalling that policymakers remain comfortable with the current policy stance.
More global funds eye Indian debt
Global asset managers, including Pictet Asset Management, Neuberger Berman and M&G Investments, have reportedly turned more positive on Indian bonds following the government’s latest policy measures.
The strong debt inflows have also helped cushion heavy foreign selling in Indian equities, which has touched nearly $30 billion so far this year. Meanwhile, the rupee has strengthened by more than 2 per cent after hitting a record low against the US dollar in May.
Analysts, however, noted that June’s inflow figures were partly boosted by the inclusion of additional government securities under the FAR category, resulting in the reclassification of existing foreign holdings. As a result, inflows may moderate in the coming months.
Despite this, the broader outlook remains positive. Goldman Sachs analysts said the government’s reforms have strengthened the case for India’s eventual inclusion in the Bloomberg Global Aggregate Bond Index, which could attract around $15 billion in passive foreign inflows over time.
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