Govt-RBI Bond Measures Work: Foreign Inflows Match 8 Months in 2 Weeks
The measures announced by the government and the Reserve Bank of India (RBI) on June 5 to attract foreign capital into Indian sovereign bonds have shown immediate results. Debt under the fully automatic route (FAR) category has received approximately $2 billion in inflows in the subsequent two weeks, nearly equalling the total foreign investment in such bonds over the previous eight months.
Data from the National Securities Depository Ltd (NSDL) indicates that foreign portfolio investors (FPIs) have net purchased FAR bonds on all but one day since the removal of capital gains taxes on government bonds and the expansion of the eligible securities pool. This has pushed net inflows in these bonds in June to $2.2 billion, the highest in 15 months. In March 2025, FPIs had invested $3.34 billion in FAR bonds, a category of government bonds open to foreign investment without restrictions.
Radhika Rao, Senior Economist at DBS Bank, noted that foreign investors have 'turned constructive' on rupee debt, supported in part by expectations that Indian government bonds could be considered for inclusion in Bloomberg's global bond indices.
The elimination of long- and short-term capital gains tax and withholding tax on foreign investment in government bonds aims to facilitate inclusion in the Bloomberg Global Aggregate Bond Index. Economists estimate this could attract $20 billion to $30 billion in passive foreign funds over 10 months following inclusion. Several global funds track a country's weight in such indices and invest accordingly.
In January, Bloomberg Index Services Ltd (BISL) deferred inclusion of Indian government bonds in its flagship global index, with an update expected by mid-2026. Over the past few years, Indian government debt has been added to indices from JPMorgan, Bloomberg's Emerging Market Local Currency Index, and FTSE Russell.
On Thursday, the yield on the benchmark 10-year Indian government bond stood at 6.77% in the secondary market, 22 basis points lower than on June 4. One basis point equals one-hundredth of a percentage point. Bond yields move inversely to prices, so a decline in yields indicates rising prices, benefiting bondholders. The drop in yields has also been supported by RBI Governor Sanjay Malhotra's comments this week, where he argued against expectations of interest rate hikes.
Despite the bond inflows, foreign investors continue to sell equities, with net share sales increasing to $5.55 billion in June from $3.45 billion in May. As a result, net FPI investment in Indian shares and debt across all categories still shows an outflow of $562 million so far in June, according to NSDL data. The Indian rupee traded at 94.40 per dollar on Thursday, not far from its June 5 level of 94.94.
Economists expect the Indian currency and bonds to strengthen once money flows in through two temporary RBI schemes encouraging public sector companies to borrow abroad and non-resident Indians to deposit foreign currency with Indian banks at higher interest rates. As of end-April, deposits in Foreign Currency Non-Resident (Bank) accounts stood at $33.92 billion, increasing by just $166 million in the first month of 2026-27. The same scheme attracted $26 billion in late 2013 and is expected to draw roughly double that amount this time. Meanwhile, registrations for external commercial borrowings (ECBs) by Indian companies were $3.77 billion in April, having declined from $42.9 billion—though the figure appears to be a typo; actual ECBs are typically lower.
