India offers tax breaks on foreign bond gains to draw overseas investors

On 5 June, the Indian government and the Reserve Bank of India mounted a two-pronged coordinated offensive to help attract foreign capital for government borrowing and ease pressure on the declining value of the national currency vis-à-vis USD.

A slew of measures, announced by the government and RBI, including full tax exemptions on foreign portfolio investment (FPI) in government bond gains, are aimed at fighting pressure on rupee depreciation and funding a rising current account deficit.

Analysts have been sharing various estimates about the foreign capital inflows expected from the measures, with some predicting as much as $50 billion until March 2027.

"During 1 April–2 June 2026, net FPI outflows from the equity and debt segments stood at 13.4 billion and US$ 0.3 billion, respectively," said RBI Governor Sanjay Malhotra in a statement.

The Indian capital market has witnessed outflows from time to time since 2024. After recording an all-time high monthly inflow of $2.85 billion in August 2024, March this year saw the highest outflows of $1.9 billion.

It is estimated that since the outbreak of the West Asia conflict in February, FPI investors have withdrawn $26.6 billion from Indian equities and another $836 million from bond markets.

The crucial question is: will the measures announced on Friday be enough? If so, how much?

The limits for investment by Nonresident Indians and Overseas Card Holders in equity instruments traded on the stock market without regulator registration are being increased. Further, the same facility is being extended to all individual Persons Resident Outside India at par with NRIs and OCIs.

RBI said a concessional forex swap will be provided until 30 September 2026 to incentivise external commercial borrowings (ECBs) by public sector undertakings (PSUs). A similar facility for bearing the full hedging cost shall be provided until 30 September this year for raising fresh 3–5-year Foreign Currency Non-Resident (Bank) deposits.

The RBI governor said while these measures are expected to strengthen the balance of payments, the banking sector regulator would continue to make policy adjustments to further promote exports and attract and incentivise capital inflows.

The strategy by the government and RBI is as much about sentiment and signalling regarding the openness of India's economy.

The assessment, right or wrong, is that a rise in dollar inflows will steady the Indian rupee without creating future vulnerabilities.

According to The Financial Express, banking and financial sector heads maintain that the industry has favoured long-term capital gains tax relief in equities while redefining long-term as three to five years against one year at present. The argument is that only a very small number of retail investors buy government debt compared with institutions, which tend to be the usual takers.