India's Government Securities Attract Record Foreign Investment After Policy Reforms

Foreign portfolio investors (FPIs) stepped up purchases of Indian government securities after the government and the Reserve Bank of India (RBI) announced measures to attract foreign capital inflows. FPIs bought ₹11,087 crore worth of government securities through the fully accessible route (FAR) over the past week following the June 5 announcements. So far in June, FPIs have made net purchases of ₹15,895 crore in government bonds — the highest in 15 months. This follows moderate inflows of ₹5,693 crore in May and ₹5,081 crore in April. In contrast, March witnessed a record outflow of ₹17,688 crore amid heightened global uncertainty following the onset of the war. FPI holdings in government securities stood at ₹3.39 lakh crore as of June 12. “The policy measures improved market sentiment and strengthened the rupee, leading to increased foreign demand for government bonds. Strong foreign demand has also contributed to a decline in government bond yields,” said Kunal Sodhani, treasury head, Shinhan Bank. On June 5, the government announced the removal of tax on capital gains and interest income earned by FPIs with effect from April 1. The RBI also unveiled a series of measures, including expanding the universe of government securities eligible under the FAR and introducing forex swap measures for overseas borrowings and FCNR deposits, among others. Sodhani said these steps could attract around $50 billion in foreign debt inflows over time, particularly if global risk sentiment improves and the rupee remains stable. “The reforms also strengthen India’s case for deeper inclusion in global bond indices, potentially bringing in a more durable pool of institutional capital,” he added. Following the announcements, the rupee appreciated 79 paise to 95.03 against the dollar, while the yield on the benchmark 10-year government bond declined 10 basis points to 6.89%. Soumyajit Niyogi, director, India Ratings, said the tax relief acts as a “useful sweetener” by helping preserve the post-tax yield differential and maintain India’s relative attractiveness. “However, for a durable revival in foreign participation, greater stability in oil prices and geopolitical conditions will be essential,” he added.