India is making an attempt to woo foreign portfolio investments (FPIs) to the government securities (G-Secs) market at a time when the market has been seeing weakness. On Friday, the government announced the exemption of 12.5% long-term capital gains tax on investments in G-Secs by foreign portfolio investors (FPIs). This is widely expected to bring Indian taxation rule at par with other emerging markets.
If FPI participation improves, it will augment the country’s foreign exchange reserves, giving more room for the country’s apex bank to defend the rupee amid stress, debt market experts said. The move could also open the door for Indian G-Secs’ inclusion in the Bloomberg Global Bond Index, which may in-turn bring inflows of around $20-25 billion over the next year.
Structural Shifts
“Given that Indian G-Secs exhibit relatively low correlation with global yields, we expect that these measures, along with the expanded FAR (Fully Accessible Route) security universe, will drive healthy FPI investments over time,” said Vikas Garg, head of fixed income at Invesco Mutual Fund.
The market has been seeing moderation and periodic outflows since 2024. Also, after recording an all-time high monthly inflow of $2.85 billion in August 2024, the month of March 2026 saw the highest outflows of $1.9 billion.
Tax challenges had largely limited the participation of FPIs in Indian G-Secs along with other factors such as persistent inflation and the Reserve Bank of India’s (RBI) interest rate cuts. In July 2024, the government had hiked the long-term capital gains tax on all listed financial assets to 12.5% from 10%. This had dented the attractiveness of debt instruments, particularly for yield-sensitive investors.
Corporate Bond Parity
Many market experts also vouched for similar exemptions for investors in corporate bonds and state development loans (SDLs), particularly amid increasing debt issuances by states and corporate entities.
“Government may consider exempting tax on corporate bonds in sectors that require long term debt capital, such as Infrastructure, large scale manufacturing, and green energy,” said Kumarmanglam Vijay, Partner and Head of Practice, Direct Tax – JSA Advocates & Solicitors. It may also consider providing a window to retail investors through a separate demat account locked in for a fixed term where they can park funds intended for the longer term and receive tax free status, he added.
Persisting challenges
While the tax exemption clears the fog around long-term inflows, the near-to-medium term picture is not as rosy. Challenges persists in terms of balance of payment, currency volatility, and better risk-adjusted returns from foreign G-Secs in the previous few years.
“It should be noted that FPI participation in Indian G-Secs has been constrained not just by taxation but also by currency hedging costs, operational complexities around market access, and periodic uncertainty around the investment limit framework,” said Basant Bafna, head of fixed income at Mirae Asset Investment Managers (India), adding that these areas need continued policy attention.
The current unfavourable market condition is also likely to hinder the tax exemption measure from giving anticipated results. “On a standalone basis, given the prevailing global yield environment and current domestic yields, the measure is unlikely to result in any material inflows,” said Rajeev Radhakrishnan, chief investment officer of fixed income at SBI Mutual Fund.