Foreign Investment in Indian Bonds Hits Record High
Overseas investors pump ₹418 billion into government bonds in June as tax changes boost market appeal
- Foreign investors invested a record ₹418 billion in India’s FAR bonds in June.
- Tax exemptions on capital gains and interest income drove strong overseas demand.
- Bond inflows are expected to support government borrowing costs and strengthen the rupee.
- Global investors remain optimistic about India’s inclusion in the Bloomberg Global Aggregate Index.
GG News Bureau
New Delhi, 1st July: India witnessed a record surge in foreign investment into its sovereign bond market in June after the government removed key tax barriers for overseas investors, boosting demand for government securities under the Fully Accessible Route (FAR).
According to data from the Clearing Corporation of India Ltd. (CCIL), foreign investors purchased ₹418 billion ($4.4 billion) worth of FAR bonds during June, nearly doubling the previous monthly record of ₹239 billion recorded in August 2024.
The sharp increase followed the Centre’s June 5 decision to abolish taxes on capital gains and interest income earned by foreign investors on eligible government bonds. The inclusion of additional securities under the FAR category further enhanced the attractiveness of Indian sovereign debt for global investors.
Market participants said the policy changes, combined with stable macroeconomic conditions, encouraged overseas funds to increase their exposure to Indian bonds.
Economists also attributed the rally to a combination of tax reforms, currency stability, easing fiscal concerns and expectations that the Reserve Bank of India will maintain an accommodative monetary stance.
Australia & New Zealand Banking Group economist Dhiraj Nim said several supportive factors had encouraged foreign investors to buy Indian bonds, though he cautioned that sustained inflows would depend on global financial conditions and the trajectory of US interest rates.
The renewed investor confidence comes after several months of subdued activity in India’s debt market. It also coincided with a strong performance in other domestic financial assets, with Indian equities outperforming many emerging markets in June and the rupee emerging as Asia’s second-best performing currency during the month.
The benchmark 10-year government bond yield declined by 25 basis points in June, marking its steepest monthly fall in six years, supported by expectations that the RBI is unlikely to tighten monetary policy soon.
Reserve Bank of India Governor Sanjay Malhotra recently said it was premature to discuss policy tightening, indicating that policymakers did not consider higher interest rates necessary at the latest monetary policy review.
Global asset managers, including Pictet Asset Management, Neuberger Berman Group, and M&G Investments, have indicated growing interest in increasing exposure to Indian government debt following the tax reforms.
Analysts noted that part of June’s record inflow reflected the reclassification of existing foreign holdings after more government securities were added to the FAR category. While this may moderate inflows in the coming months, the broader trend points to rising overseas participation in India’s bond market.
Analysts at Goldman Sachs said the recent policy measures strengthen the case for India’s eventual inclusion in the Bloomberg Global Aggregate Index, estimating that such a move could attract around $15 billion in passive investment flows during the index inclusion period. Bloomberg Index Services has indicated it will provide an update on India’s inclusion by mid-2026.
