RBI Unveil Tax Exemptions to Attract Foreign Capital, Strengthen Rupee

In a coordinated effort to boost foreign capital inflows and stabilize the Indian rupee, the Government of India and the Reserve Bank of India (RBI) on Friday announced a series of sweeping measures aimed at making Indian government bonds, bank deposits, and equity markets more attractive to foreign investors.

The announcement triggered a strong market reaction, with the rupee appreciating by 84 paise to close at ₹94.95 per US dollar, compared to Thursday’s closing level of ₹95.79. This marked the domestic currency’s biggest single-day gain in nearly two months.

Tax Exemptions for Foreign Investors in Government Securities

One of the most significant reforms came from the government, which issued an ordinance amending the Income Tax Act to exempt foreign investors from paying income tax on both interest income and capital gains arising from investments in Government Securities (G-Secs).

The amendment, effective retrospectively from April 1, removes the earlier tax burden under which Foreign Portfolio Investors (FPIs) faced a 20% withholding tax on interest income and a 12.5% long-term capital gains tax on listed securities held for more than one year.

The tax exemption also extends to investments made by the Bank for International Settlements (BIS), headquartered in Basel, Switzerland.

Market participants believe the move significantly enhances the attractiveness of Indian sovereign debt in global investment portfolios.

RBI Offers Currency Risk Protection

Complementing the government’s fiscal initiative, the RBI introduced measures aimed at reducing currency-related risks for overseas investors and lenders.

The central bank announced a temporary swap facility under which it will bear the full hedging cost for fresh foreign currency non-resident (FCNR) deposits with maturities ranging from three to five years mobilized by banks until September 30, 2026.

In addition, RBI launched a concessional swap window for External Commercial Borrowings (ECBs) raised by public sector undertakings during the same period.

Bankers described the move as a major incentive because it effectively provides protection against rupee depreciation, making Indian deposits and debt instruments more attractive to foreign investors.

Potential for Large Deposit Inflows

Banking industry estimates suggest that the measures could generate substantial inflows into the banking system.

According to market participants, if overseas individuals are permitted to deploy borrowed funds into India to take advantage of the higher interest rates available domestically, inflows into bank deposits alone could potentially reach $30–40 billion.

The RBI’s swap facility significantly lowers currency risk, a key factor that often discourages foreign investors from participating in emerging market debt and deposit products.

Expanded Access to Government Bonds

The RBI also broadened the scope of the Fully Accessible Route (FAR), under which foreign investors can invest in designated government securities without investment restrictions.

The expanded list now includes:

Newly issued 15-year Government Securities
Newly issued 30-year Government Securities
Newly issued 40-year Government Securities
Eligible Sovereign Green Bonds

The move is expected to improve foreign participation across longer-duration segments of India’s government bond market.

Relaxation of FPI Investment Restrictions

Further liberalization was introduced under the general route for foreign investments in government debt.

The RBI removed several restrictions, including:

Short-term investment limits
Concentration limits
Security-wise investment caps

However, the overall investment ceilings remain unchanged at:

6% of outstanding Central Government Securities
2% of outstanding State Development Loans (SDLs)

The changes are intended to provide greater flexibility to global investors while maintaining prudential safeguards.

Overseas Individuals Allowed Direct Access to Indian Equities

In another significant reform aimed at widening foreign participation in Indian capital markets, the government has permitted Persons Resident Outside India (PROIs) to invest directly in listed Indian companies through the Portfolio Investment Scheme.

Previously, this route was largely restricted to Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs).

The revised framework increases the individual investment limit to 10% per company, while raising the aggregate cap to 24%, thereby expanding the pool of potential foreign investors in Indian equities.

Rupee Support Amid Foreign Outflows

The coordinated policy package comes at a time when the rupee has faced sustained pressure from foreign capital outflows. According to market data, foreign portfolio investors have withdrawn nearly ₹2.6 lakh crore from Indian markets so far this year, making the rupee one of the weakest-performing Asian currencies.

By easing tax burdens, reducing currency risks, and expanding investment opportunities, the government and RBI are seeking to restore investor confidence, attract fresh foreign capital, and provide support to the domestic currency while strengthening India’s position in global financial markets.

A Coordinated Push for Capital Inflows

The latest measures represent one of the most comprehensive efforts in recent years to attract overseas investment into India’s debt and equity markets. While the immediate impact has been a sharp recovery in the rupee, policymakers will be closely watching whether the incentives translate into sustained foreign inflows without creating long-term vulnerabilities associated with volatile capital movements.