Govt, RBI’s June 5 bond measures working; pull 8 months of foreign money in two weeks
FPI investment in FAR bonds — a category of government bonds that foreigners can invest in without any restrictions — has been $2.2 billion in June, the most in 15 months.
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 started to work as hoped — debt falling under the fully accessible route (FAR) category has seen inflows to the tune of $2 billion in the subsequent two weeks, almost equal to the money that had come in the previous eight months combined.
Data from the National Securities Depository Ltd (NSDL) showed that foreign portfolio investors (FPIs) have net bought FAR bonds on all but one day since capital gain taxes on government bonds were done away with and the pool of securities in this category expanded. This has led to net inflows in these bonds in June rising 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 that foreigners can invest in without any restrictions.
According to Radhika Rao, Senior Economist at DBS Bank, foreign investors have “turned constructive” on rupee debt. “Sentiment has been supported in part by expectations that Indian government bonds could be considered for inclusion in Bloomberg’s global bond indices,” Rao said on Wednesday.
Cooling bond yields
The removal of long- and short-term capital gains as well as the withholding tax on investment by foreign investors in government bonds was aimed at spurring their inclusion in the Bloomberg Global Aggregate Bond Index, which economists predict could pull in anywhere between $20 billion to $30 billion of passive foreign funds over a period of 10 months post inclusion.
Several global funds track the weight a certain country has in these bond indices and invest accordingly.
In January, Bloomberg Index Services Ltd (BISL) had deferred the inclusion of Indian government bonds into its flagship global index, saying it will provide another update by mid-2026. Over the last couple of years, Indian government debt has been added to bond indices of JPMorgan, Bloomberg’s Emerging Market Local Currency Index and that of FTSE Russell.
On Thursday, yield on the benchmark 10-year Indian government bond was 6.77% in the secondary market, 22 basis points (bps) lower than on June 4.
One basis point is one-hundredth of a percentage point. Bond yields move opposite to their prices. So, a fall in yields means prices have risen, which is profitable for bond holders.
The decline in bond yields has also been aided by comments by RBI Governor Sanjay Malhotra, who in an interview this week argued against expectations of interest rate hikes.
Next triggers
While foreign investors are now putting more money into government bonds, they continue to dump stock, with net share sales increasing to $5.55 billion so far this month from $3.45 billion in May.
Consequently, net FPI investment in Indian shares and debt across all categories has still seen an outflow of $562 million so far in June, as per NSDL data. As a result, the Indian rupee is trading not too far from its June 5 level of 94.94 per dollar, having closed at 94.40 on Thursday.
Economists, though, expect the Indian currency and bonds to climb once money flows into the country thanks to the RBI’s two temporary schemes that encourage public sector companies to borrow from abroad and non-resident Indians to deposit their foreign currency money with Indian banks at higher-than-usual interest rates.
As per latest available data, deposits in Foreign Currency Non-Resident (Bank) accounts stood at $33.92 billion at the end of April, having increased by just $166 million in the first month of 2026-27. The same scheme had attracted $26 billion in the last few months of 2013 and is expected to pull around double that figure this time around.
Meanwhile, registrations for external commercial borrowings (ECBs) by Indian companies stood at $3.77 billion in April, having fallen to $42.97 billion in 2025-26 from $61.18 billion in 2024-25.
According to Aditi Gupta, an economist at Bank of Baroda, while the share of PSUs in total ECB registrations in 2025-26 was only 15-20%, “there is a huge, untapped potential”.
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 started to work as hoped — debt falling under the fully accessible route (FAR) category has seen inflows to the tune of $2 billion in the subsequent two weeks, almost equal to the money that had come in the previous eight months combined.
Data from the National Securities Depository Ltd (NSDL) showed that foreign portfolio investors (FPIs) have net bought FAR bonds on all but one day since capital gain taxes on government bonds were done away with and the pool of securities in this category expanded. This has led to net inflows in these bonds in June rising 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 that foreigners can invest in without any restrictions.
According to Radhika Rao, Senior Economist at DBS Bank, foreign investors have “turned constructive” on rupee debt. “Sentiment has been supported in part by expectations that Indian government bonds could be considered for inclusion in Bloomberg’s global bond indices,” Rao said on Wednesday.
Cooling bond yields
The removal of long- and short-term capital gains as well as the withholding tax on investment by foreign investors in government bonds was aimed at spurring their inclusion in the Bloomberg Global Aggregate Bond Index, which economists predict could pull in anywhere between $20 billion to $30 billion of passive foreign funds over a period of 10 months post inclusion.
Several global funds track the weight a certain country has in these bond indices and invest accordingly.
In January, Bloomberg Index Services Ltd (BISL) had deferred the inclusion of Indian government bonds into its flagship global index, saying it will provide another update by mid-2026. Over the last couple of years, Indian government debt has been added to bond indices of JPMorgan, Bloomberg’s Emerging Market Local Currency Index and that of FTSE Russell.
On Thursday, yield on the benchmark 10-year Indian government bond was 6.77% in the secondary market, 22 basis points (bps) lower than on June 4.
One basis point is one-hundredth of a percentage point. Bond yields move opposite to their prices. So, a fall in yields means prices have risen, which is profitable for bond holders.
The decline in bond yields has also been aided by comments by RBI Governor Sanjay Malhotra, who in an interview this week argued against expectations of interest rate hikes.
Next triggers
While foreign investors are now putting more money into government bonds, they continue to dump stock, with net share sales increasing to $5.55 billion so far this month from $3.45 billion in May.
Consequently, net FPI investment in Indian shares and debt across all categories has still seen an outflow of $562 million so far in June, as per NSDL data. As a result, the Indian rupee is trading not too far from its June 5 level of 94.94 per dollar, having closed at 94.40 on Thursday.
Economists, though, expect the Indian currency and bonds to climb once money flows into the country thanks to the RBI’s two temporary schemes that encourage public sector companies to borrow from abroad and non-resident Indians to deposit their foreign currency money with Indian banks at higher-than-usual interest rates.
As per latest available data, deposits in Foreign Currency Non-Resident (Bank) accounts stood at $33.92 billion at the end of April, having increased by just $166 million in the first month of 2026-27. The same scheme had attracted $26 billion in the last few months of 2013 and is expected to pull around double that figure this time around.
Meanwhile, registrations for external commercial borrowings (ECBs) by Indian companies stood at $3.77 billion in April, having fallen to $42.97 billion in 2025-26 from $61.18 billion in 2024-25.
According to Aditi Gupta, an economist at Bank of Baroda, while the share of PSUs in total ECB registrations in 2025-26 was only 15-20%, “there is a huge, untapped potential”.
