In a bid to preserve foreign exchange reserves and defend the rupee, the Indian government and the Reserve Bank of India (RBI) on Friday unveiled a series of measures aimed at attracting foreign capital inflows. The steps come amid record foreign portfolio outflows exceeding $23 billion in 2025, far surpassing the entire year's withdrawals, and a sharp depreciation of the rupee from 85 to 96 against the US dollar since January 2025. The ongoing US-Iran conflict has exacerbated pressure on the external sector, with rising crude oil prices threatening to widen the current account deficit and India's balance of payments facing a potential third consecutive year of deficit.
Key Measures Announced
The government exempted foreign investors from tax on interest income and capital gains earned from government securities, effective retrospectively from April 1, 2026. The amendment to the Income Tax Act was notified via a gazette notification dated June 5. Additionally, the RBI announced five steps to attract foreign capital:
- Expansion of 'specified securities' under the Fully Accessible Route (FAR) to include all new issuances of 15-, 30-, and 40-year tenure government securities.
- Removal of limits on short-term investment, concentration, and individual securities for Foreign Portfolio Investors (FPI) under the General Route.
- Increased investment limits for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) in listed equity instruments without requiring registration with the securities regulator, extended to all individual Persons Resident Outside India (PROIs).
- Concessional forex swap facility till September 30 to incentivize External Commercial Borrowings (ECBs) by public sector undertakings.
- Facility for authorized dealer banks to bear full hedging cost for raising fresh 3–5-year FCNR (B) deposits.
The time for realization of export proceeds has also been extended to nine months.
Impact on Foreign Investors
Experts believe these moves make Indian bonds highly attractive. Tanvi Kanchan, Associate Director at Anand Rathi Share and Stock Brokers Limited, noted that the complete exemption of FII returns on government securities eliminates tax-related reasons for underweighting Indian sovereign debt. India's G-Secs now offer a pre-tax yield of approximately 7% as the after-tax yield for foreign investors, an improvement of 140–150 basis points overnight. Vivek Iyer, Partner at Grant Thornton Bharat, emphasized that exempting capital gains tax increases attractiveness, calling it a proactive step despite India's forex reserves of over $680 billion. Tejas Desai, Partner at EY India, highlighted that the reform aligns India's bond market with global standards, enhancing post-tax returns and reducing entry frictions.
Expected Inflows
Sachchidanand Shukla, Group Chief Economist at Larsen & Toubro, estimated that these measures could lead to $40-60 billion inflows. VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, noted that while the impact will be gradual, currency risk is lower now. Tanvi Kanchan expects immediate effects on the rupee and G-Sec yields, with potential front-loading of flows within weeks. The rupee appreciated 81 paise to close at 94.93 against the US dollar on Friday. RBI Governor Sanjay Malhotra indicated that healthy foreign capital inflows and a stronger balance of payments are expected, though no specific target was set.
Conclusion
The combined package is designed to attract substantial overseas capital, with experts highlighting that high-quality, patient capital will be drawn to longer-tenure securities. As India looks to defend the rupee and bolster forex reserves, these steps will be closely monitored for their effectiveness in keeping the external sector resilient.
