- India plans measures to attract capital, strengthen foreign inflows.
- Government considers reducing foreign bond investors’ interest income tax.
- RBI may expand foreign access to long-term government bonds.
India may soon unveil a fresh set of measures aimed at attracting overseas capital into its debt and equity markets, as policymakers look to strengthen foreign investment inflows amid ongoing pressure on the rupee and heightened global uncertainty.
According to a Bloomberg report citing people familiar with the matter, the Union Cabinet is expected to discuss proposals that could significantly reduce the tax burden on foreign investors buying Indian bonds. The move is being viewed as part of a broader effort to make Indian financial markets more attractive to global capital at a time when emerging markets are competing for investment flows.
Foreign Bond Investors Could Get A Tax Break
One of the key proposals under consideration relates to the taxation of interest income earned by overseas investors on Indian bonds.
At present, foreign funds pay a 20 per cent tax on interest earned from bond investments. According to the report, policymakers are examining whether this levy should be abolished entirely or reduced substantially.
While discussions are still underway and no final decision has been announced, any reduction in the tax rate could improve the attractiveness of Indian debt instruments relative to other investment destinations.
If approved, the proposal would represent another step in India’s efforts to deepen foreign participation in its bond market and broaden the investor base for government and corporate debt.
Why India Wants More Foreign Capital
The timing of the discussions is significant.
India has been navigating a difficult external environment marked by rising oil prices, global geopolitical tensions and volatility in international capital flows. The ongoing conflict involving Iran has contributed to higher energy costs, increasing pressure on the country’s import bill and external balances.
At the same time, foreign portfolio outflows and global trade uncertainties have added to concerns around capital flows into emerging markets.
Against this backdrop, attracting long-term foreign investment has become an increasingly important policy objective.
Prime Minister Narendra Modi recently urged citizens to help conserve foreign exchange as higher oil import costs continue to weigh on the economy.
RBI May Expand Access To Government Bonds
Alongside potential tax reforms, the Reserve Bank of India is also expected to take steps aimed at improving foreign access to government securities, reported The Financial Express.
According to the report, the central bank is considering adding more long-term government bonds to the Fully Accessible Route (FAR), a framework that allows overseas investors to purchase specified government securities without any ownership restrictions.
The RBI last revised the FAR list in 2024, when it removed 14-year and 30-year government bonds from the programme.
A fresh expansion could help improve liquidity in the government bond market while providing foreign investors with greater flexibility in choosing investment maturities.
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Rupee Recovery Remains Fragile
The renewed focus on attracting overseas investment comes as the rupee continues to face external pressures.
The currency touched a record low of 96.9650 against the US dollar on May 20, driven by a combination of factors including rising crude oil prices, foreign fund outflows and global trade concerns.
Although the rupee has since recovered some ground following intervention measures by the Reserve Bank of India and easing oil prices amid renewed US-Iran peace efforts, policymakers remain mindful of risks to the currency.
Market participants often view sustained foreign capital inflows as an important source of support for both the rupee and India’s foreign exchange reserves.
New Route For Overseas Indians To Invest
The government is also expected to expand investment opportunities for overseas Indians.
According to the report, authorities are likely to notify a proposal allowing individual Persons Resident Outside India (PROIs) to invest in shares of listed Indian companies through the Portfolio Investment Scheme.
The move would create an additional channel for overseas investors to participate in Indian equity markets and could help broaden the pool of international capital available to domestic companies.
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A Broader Push To Make India More Investor-Friendly
Taken together, the proposed measures signal a wider effort to make India a more attractive destination for global investors.
Lower taxes on bond income, wider access to government securities and new investment routes for overseas Indians could help strengthen capital inflows at a time when the country is balancing ambitious growth targets with external economic challenges.
The Finance Ministry and the Reserve Bank of India have not officially commented on the report. However, Bloomberg had reported last month that the government was examining tax-relief proposals following recommendations from the central bank.
Should the measures receive Cabinet approval, they could mark one of the most significant recent attempts to boost foreign participation in India’s financial markets while supporting the country’s broader economic and investment objectives.
