The package of measures unveiled by the government and the Reserve Bank of India (RBI) to attract foreign capital and stabilise the rupee could bring in $40-50 billion over the coming months. That would provide a meaningful cushion against a widening balance-of-payments deficit and ease concerns over India’s external financing requirements at a time of elevated crude oil prices and global uncertainty.
A substantial portion of the inflows is expected to come through fresh foreign currency non-resident (bank) FCNR(B) deposits. Banks could mobilise $25-30 billion in non-resident deposits with maturities of three to five years, aided by an RBI swap facility under which the central bank will absorb the hedging costs. The same concessional swap window will be available to public sector entities raising external commercial borrowings (ECBs), reducing borrowing costs, and potentially facilitating another $20-25 billion of overseas funding.
Macro Comparison
To be sure, the backdrop is less favourable than it was in 2013, when a similar FCNR(B) scheme was introduced during the taper tantrum. US interest rates are significantly higher today. Even so, banks should be able to offer non-resident depositors returns of 6-6.6%, compared with US Treasury yields of around 4.2-4.4% for comparable maturities, because they will no longer bear the annualised hedging cost of roughly 3%.
The 2013 scheme had helped mobilise about $26 billion in deposits. The government has complemented these measures by scrapping the 12.5% capital gains tax and the 20% tax on coupon interest earned by foreign portfolio investors (FPIs) in government securities. It has also expanded the pool of eligible securities under the Fully Accessible Route (FAR) to include more long-dated bonds and relaxed several investment restrictions, including short-term limits, concentration caps, and individual security restrictions.
Sovereign Debt Dynamics
These tax concessions make India a more competitive destination for fixed-income investors relative to peers such as Indonesia, Malaysia, Mexico, and South Africa. Given that foreign investment in government securities is among the least expensive sources of external financing, the move is both timely and sensible. Yet taxation has not been the principal reason for subdued foreign participation in India’s sovereign debt market.
Currency risk has been the bigger deterrent. Despite relatively attractive yields, foreign appetite for Indian government bonds has weakened sharply. Inflows through the FAR route fell from nearly $15 billion in 2024 to $6.4 billion in 2025, while net inflows this year have remained modest. The reason is straightforward: the rupee has depreciated significantly against the dollar since early 2025, eroding much of the return available to foreign investors. Although currency hedging is possible, post-tax hedged returns have often not been compelling enough to justify large allocations. Higher US interest rates have also narrowed the yield advantage that Indian bonds traditionally enjoyed.
Even so, the tax relief may deliver benefits beyond immediate capital inflows. It could help address one of the factors that has delayed India’s inclusion in major global bond benchmarks such as the Bloomberg Global Aggregate Index and the FTSE World Government Bond Index. India is already represented in prominent global bond indices, yet foreign investors still hold only around 3% of the country’s $1.3-trillion sovereign debt market, compared with roughly 12% in Indonesia. Inclusion in additional benchmarks would automatically broaden the investor base by attracting passive funds, pension pools, and other long-term institutional investors.
While the latest measures are clearly a step in the right direction, they are unlikely on their own to trigger a dramatic surge in foreign investment. The higher investment limits for non-resident Indians and overseas citizens of India will improve access, but investors will continue to focus on currency stability and relative returns. India remains an attractive destination because of its growth prospects and prudent macroeconomic management. But if policymakers want foreign participation in the bond market to rise meaningfully, restoring confidence in the rupee will be just as important as offering tax incentives. Sustained capital inflows ultimately depend on both.
