S Naren, chief investment officer and executive director at ICICI Prudential Mutual Fund, and former Securities and Exchange Board of India whole-time member Ananth Narayan expressed optimism that the recent measures announced by the government and the Reserve Bank of India (RBI) would improve foreign portfolio investor (FPI) inflows into the fixed-income market.
Speaking at the ICICI Securities India Investor Conference, Naren said the measures could help break the vicious cycle of negative sentiment surrounding the rupee and support debt inflows. However, he noted that attracting higher FPI inflows into equities would be more challenging.
Narayan said the removal of withholding tax was the most consequential among the regulatory changes announced last week. He highlighted concerns foreign investors faced under the earlier regime, including the inability to offset taxes in certain cases, even for investors from countries with which India has double taxation avoidance agreements.
He added that the tax treatment sometimes resulted in liabilities even when investors incurred losses in dollar terms despite recording gains in rupee terms.
According to Narayan, the latest measures could facilitate the inclusion of Indian debt securities in the Bloomberg Aggregate Index, potentially attracting inflows of $25–30 billion. He said the reforms should pave the way for a broader discussion on taxation of FPIs in equities, describing it as the next logical step to boost foreign investment in Indian markets.
Naren concurred that the measures improve the prospects of India’s inclusion in the Bloomberg Aggregate Index, noting that taxation and rupee depreciation had been key deterrents for foreign investors. He also pointed to the positive market response on the debt side following the announcements.
He said most foreign inflows since 2023 had been directed towards equities, contributing to relatively higher valuations in Indian markets compared with global peers and prompting some FPIs to reduce equity exposure.
Narayan identified the narrowing interest-rate differential between India and overseas markets as another factor behind subdued FPI inflows into both debt and equity. He argued that policy changes in recent years, including the withdrawal of indexation benefits, reduced the attractiveness of debt investments by lowering post-tax returns.
As a result, a significant portion of discretionary capital shifted towards equities, creating pockets of overvaluation and making Indian markets less attractive for fresh foreign equity inflows, he said. The lower interest-rate differential also encouraged FPIs to withdraw capital rather than deploy additional funds in Indian markets.
