Cut Bond Taxes India looks to bring foreign money back into its markets
With the rupee facing pressure and foreign funds leaving Indian markets, policymakers may be preparing fresh measures to attract overseas capital.
The government is considering tax cuts on bond income and easier access to government securities for global investors. The proposals could be announced as early as this week.
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Why India Is Considering Cut Bond Taxes for Foreign Bond Investors
India is preparing a series of measures to attract more foreign capital as policymakers seek to support the rupee amid rising oil prices, foreign fund outflows and global economic uncertainty. The government is reportedly considering reducing or even eliminating the 20% tax on interest earned by foreign investors on Indian bonds, while also removing certain investment restrictions on government securities.
Key Measures Under Consideration
- Reduction or removal of the 20% withholding tax on bond interest earned by foreign investors.
- Possible elimination of the 12.5% capital gains tax on foreign investments in government bonds.
- Expansion of the RBI’s Fully Accessible Route (FAR), allowing overseas investors to buy selected government bonds without investment limits.
- Allowing Persons Resident Outside India (PROIs) to invest in listed Indian companies through the portfolio investment scheme.
Why the Government Is Acting
The move comes as the Indian rupee faces pressure from multiple factors, including higher oil import costs, foreign portfolio outflows and global trade uncertainties. The rupee has fallen more than 5% against the US dollar this year, making it one of Asia’s weaker-performing currencies. Policymakers hope that attracting more foreign money into Indian bonds will help stabilize the currency and strengthen capital inflows.
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Types of Indian and Foreign Bonds
Bonds can be classified based on the issuer, currency denomination, and market of issuance. Indian investors can access both domestic and international fixed-income instruments, each offering different risk and return profiles.
| Bond Type | Issuer | Currency | Typical Yield (2026) | Price Benchmark* |
|---|---|---|---|---|
| Indian Government Securities (G-Secs) | Government of India | INR | 7.0%–7.2% | ₹100 per ₹100 face value |
| Treasury Bills (T-Bills) | Government of India | INR | 6.0%–6.8% | Issued at discount to face value |
| PSU Bonds | Government-backed companies | INR | 7.2%–8.0% | ₹10,000 face value |
| Sovereign Gold Bonds (SGBs) | Government of India | INR | Gold-linked + 2.5% interest | Linked to gold price |
| Corporate Bonds | Private companies | INR | 7.5%–10%+ | Varies by issuer rating |
| US Treasury Bonds | US Government | USD | 4.4%–4.6% | $100 face value |
| Yankee Bonds | Foreign issuers in US | USD | 5.0%–6.5% | $100 face value |
| Eurobonds | Global issuers | USD/EUR | 4.5%–8.0% | $100 or €100 face value |
| Samurai Bonds | Foreign issuers in Japan | JPY | 1.0%–3.5% | ¥100 face value |
| Masala Bonds | Indian issuers overseas | INR | 5.5%–7.5% | ₹1,000 face value |
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*Bond prices fluctuate daily based on interest rates, demand, credit quality and maturity.
Key Difference Between Indian and Foreign Bonds
- Indian bonds are largely influenced by RBI policy, domestic inflation and government borrowing.
- Foreign bonds are influenced by global interest rates, US Federal Reserve policy and currency movements.
- Masala Bonds are unique because they are issued overseas but denominated in Indian rupees.
- US Treasuries remain the global benchmark for risk-free returns and are closely watched by investors worldwide.
RBI may expand access to sovereign bonds
The Reserve Bank of India is also expected to review the Fully Accessible Route (FAR) framework.
Under the proposal, certain long-term government bonds could become available to foreign investors without investment limits.
The move would increase overseas participation and potentially deepen India’s bond market.
Why the Rupee Has Come Under Pressure
The rupee’s decline in 2026 is being driven by a combination of domestic and global factors. While policymakers are looking to attract foreign bond investors, the currency continues to face pressure from rising oil prices, foreign fund outflows and a stronger US dollar.
The proposals come as authorities try to support the rupee amid multiple external challenges.
Foreign fund outflows, elevated oil prices, global trade uncertainty and geopolitical tensions have all weighed on the currency this year.
The rupee touched a record low of 96.9650 against the US dollar in May before recovering on central bank support and softer oil prices.
Key Drivers of the Rupee’s Weakness
- Higher Oil Prices: Brent crude has surged from around $70 to over $110 per barrel, increasing India’s import bill and putting pressure on the current account deficit.
- Foreign Fund Outflows: Foreign investors have pulled out significant sums from Indian equities and debt markets, increasing demand for US dollars.
- Strong US Dollar: Expectations of higher US interest rates have strengthened the dollar globally, making emerging-market currencies less attractive.
- Overseas Remittances: Rising outward remittances by residents have further increased demand for foreign currency.
Why Foreign Bond Flows Matter
The government believes attracting more foreign investment into Indian bonds could help offset these pressures. Higher foreign inflows would increase demand for rupee-denominated assets, support the currency and help stabilize financial markets during a period of global uncertainty.
Overseas investors may get wider access to Indian stocks
The government is also likely to expand investment opportunities for individuals living outside India.
Under the proposal, Persons Resident Outside India (PROIs) could be allowed to invest in listed Indian companies through the Portfolio Investment Scheme.
The step could bring additional foreign capital into domestic equity markets.
Which Stocks Could Benefit From India’s Bond Market Reforms?
If the government proceeds with tax cuts for foreign bond investors and expands access to government securities, several sectors could benefit from higher capital inflows, increased market activity, and improved liquidity.
Exchange Operators & Market Infrastructure
Exchange operators stand to be among the biggest beneficiaries as higher foreign participation boosts trading volumes, clearing activity, and settlement revenues.
Potential beneficiaries:
- BSE Ltd
- Multi Commodity Exchange of India
Brokerage & Capital Market Firms
Higher foreign investment flows typically translate into increased trading activity, benefiting brokers, investment platforms, and capital market intermediaries.
Potential beneficiaries:
- Angel One
- Motilal Oswal Financial Services
- ICICI Securities
Asset Management Companies (AMCs)
Greater foreign participation often improves overall market sentiment and can drive inflows into mutual funds, ETFs, and debt products.
Potential beneficiaries:
- Nippon Life India Asset Management
- HDFC Asset Management Company
- UTI Asset Management Company
Banks With Large Government Bond Portfolios
Banks holding substantial government securities may benefit from stronger demand for Indian bonds, improved valuations, and enhanced treasury gains.
Potential beneficiaries:
- State Bank of India
- Bank of Baroda
- Punjab National Bank
NBFCs and Debt Market Participants
Improved bond market liquidity can lower borrowing costs and improve funding access for non-banking financial companies.
Potential beneficiaries:
- Bajaj Finance
- Shriram Finance
- Cholamandalam Investment and Finance Company
What impact could this have on investors?
If implemented, the reforms could increase foreign demand for Indian bonds and improve market liquidity.
Higher capital inflows may also help stabilize the rupee and strengthen investor confidence.
For equity investors, greater foreign participation could support market sentiment in the months ahead.
The broader message is clear: India is looking for ways to attract global capital at a time when competition for investment flows is intensifying.
