FPI Investment in Government Bonds Surges After Tax Exemption, Boosting India’s Debt Market

The government has taken this step to attract more foreign capital into the domestic debt market. It is also aimed at supporting the rupee amid external pressures. Previously, foreign investors were subject to a 12.5% ​​long-term capital gains tax on listed shares and bonds. This tax was applicable on securities held for more than 12 months. A 20% withholding tax was also applicable on interest earned on government bonds. The new exemptions will provide significant benefits to investors, increasing their interest in investing.

The Reserve Bank of India made significant changes in its June monetary policy announcement. It expanded the scope of securities available under the FAR to include all new government securities with 15-year, 30-year, and 40-year tenors. The central bank also removed certain restrictions on FPI investment under the normal route, including those related to short-term investments, concentration, and individual securities. The RBI stated that these measures will help attract foreign capital for government borrowing and will also increase liquidity in the market.

The Indian government aims to deepen the bond market through these measures. It aims to facilitate greater participation by global investors. These steps have further opened the government securities market to foreign investors. According to Mataprasad Pandey, this increases India's chances of being included in global bond indices, including Bloomberg's Sovereign Bond Index. The inclusion decision was postponed earlier this year. India's position has now become stronger.

The FAR route is a framework designed not primarily for equities, but for foreign investment in Indian government bonds. FAR stands for Fully Accessible Route. It was launched by the Reserve Bank of India in 2020. Under this, foreign investors can invest in certain government bonds without any investment limit. Suppose the RBI issued a government bond worth ₹100,000 crore under FAR. Under normal rules, there may be investment limits for foreign investors. FAR bonds do not have such limits. Foreign investors can invest as per their wish.