Foreign Cash Floods Indian Bonds As Tax-Free G-Secs Lure Up To $50 Billion

A quiet but consequential rally is under way in India's debt market, where foreign portfolio investors have begun deploying serious capital after the government scrapped income tax on interest and capital gains from government securities. The exemption, applying to income arising on or after 1 April 2026, is being hailed as one of the most significant structural reforms to India's bond market in years.

The numbers move fast

Following the announcement, FPIs invested roughly Rs 8,795 crore into government securities under the Fully Accessible Route, lifting their FAR holdings to about Rs 3.32 trillion, up from Rs 3.23 trillion in early June, according to Clearing Corporation of India data. NSDL figures showed FPIs had ploughed more than Rs 25,000 crore into Indian bonds through June 16, including around Rs 17,000 crore via the FAR.

Axis Bank economists estimate the tax exemption could attract approximately $45-50 billion of foreign investment into government bonds over two years, a flow that would help bridge the Centre's funding gap, deepen the bond market and ease borrowing costs across the curve.

Why it matters for the rupee

Sustained debt inflows offer a counterweight to the equity outflows that have dogged Indian markets, where FIIs have at times preferred cheaper valuations and AI-themed opportunities elsewhere. A steady stream of dollars into bonds supports the rupee and lowers the cost at which the government and corporates raise money, a virtuous loop that policymakers have long sought.

• Capital-gains and interest tax exemption on G-Secs took effect for income from 1 April 2026.
• FAR holdings rose to about Rs 3.32 trillion in early June.
• FPIs invested over Rs 25,000 crore in Indian bonds through June 16.
• Economists estimate $45-50 billion in inflows over two years.
• RBI expanded FAR to include new 15-, 30- and 40-year tenors.

What's next

Analysts say the real test will be whether the inflows prove sticky once the initial enthusiasm fades, and whether India's potential inclusion and weighting in global bond indices amplifies the trend. The RBI's decision to widen the FAR to longer-dated paper is designed to give foreign buyers the duration they want, a sign authorities are leaning into the reform.

“Tax-free G-Secs change the math for a global pension fund looking at India. This is the kind of structural pull the bond market needed.”

— Fixed-income strategist at a private bank

If the flows hold, the reform could mark a turning point for a market that has historically punched below its weight relative to the size of India's economy, even as officials watch for any volatility should global rates shift abruptly.

The NE Times View

A capital-gains exemption that could pull in up to $50 billion is a powerful sweetener, lowering borrowing costs and deepening the bond market. But foreign money chasing tax breaks is fickle, and heavy reliance on it leaves yields hostage to global sentiment. The policy works only if paired with fiscal discipline. Cheap debt is a gift; treating it as licence to overspend would squander it.

This article is original commentary and analysis by The NE Times. Background facts were referenced from Business Standard and Business Today.