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India’s recent decision to remove taxes on foreign investments in government bonds and expand access to its debt market has drawn a positive response from global investors. More than USD 1 billion flowed into government securities within days of the announcement, while bond yields declined across maturities. Investors and asset managers believe the reforms could boost foreign participation, support lower borrowing costs and strengthen India’s chances of inclusion in major global bond indexes. However, currency movements and global market volatility remain important factors that could influence future inflows.
India’s efforts to attract foreign capital received an early boost after policymakers introduced a series of measures aimed at making the country’s debt market more accessible to overseas investors.
The reforms, announced in the past week, included the removal of withholding tax and capital gains tax on foreign investments in government bonds. Authorities also expanded the pool of government securities available without investment restrictions and introduced incentives to encourage foreign currency deposits from non-resident Indians and overseas borrowings by companies.
The measures were unveiled as policymakers sought to strengthen external balances and support the rupee amid pressure from rising global oil prices.
The market response has been immediate. Foreign investors purchased more than USD 1 billion worth of Indian government bonds within three trading sessions following the announcement. Before the reforms, foreign investors had bought around USD 1.6 billion worth of government debt during the year.
Government bond yields have also declined across the curve, falling between 10 and 30 basis points, with shorter-duration securities seeing the largest drop. Lower yields generally indicate stronger demand and can help reduce borrowing costs over time.
Global asset managers have welcomed the changes. Jennifer Taylor, Head of Emerging Market Debt and Systematic Fixed Income at State Street Investment Management, said the reforms could be a significant development for debt inflows. She noted that removing taxes improves the relative attractiveness of Indian government bonds and is expected to encourage broader foreign participation.
Investors also believe the reforms could strengthen India’s bid for inclusion in major global bond indexes. Niel Clement, Portfolio Manager for Emerging Market Fixed Income at BNP Paribas Asset Management, said the measures would broaden opportunities for overseas investors and support India's case for inclusion in the Bloomberg Global Aggregate Index.
Bloomberg Index Services is expected to seek investor feedback later this month on whether Indian government bonds should be included in its flagship global bond benchmark. Market participants view such inclusion as a major opportunity because it could attract long-term and predictable foreign capital from funds that track global indexes.
According to a government official, India’s Finance Minister held discussions with Reserve Bank of India officials in the weeks before the tax reforms as part of efforts to advance the country’s inclusion in the Bloomberg index.
While investor sentiment has improved, some market participants remain cautious. Rong Ren Goh, Head of Macro and Thematics for Asian Fixed Income at Eastspring Investments, said currency stability remains a key concern for foreign investors. The rupee has declined about 5.86 per cent against the U.S. dollar this year, although it has shown some recovery since the latest measures were announced.
Economists at Citi have revised India's balance of payments outlook, now expecting a USD 5 billion surplus for the current fiscal year compared with an earlier forecast of a USD 60 billion deficit. Investors believe this improvement could provide support to the rupee and strengthen confidence in India's debt market.
Source - Reuters
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