India, on June 5, undertook a slew of measures aimed at boosting foreign capital inflows at a time the country’s balance of payments (BoP)—the difference in the value of inflows into the country and outflows—is under stress.
India’s BoP situation has been under the scanner due to the tensions in West Asia and a major outflow of capital, both in the form of repatriation by multinational companies as well as the retreat of foreign portfolio investors (FPIs) from the Indian stock markets.
The Reserve Bank of India (RBI), for one, took measures to attract foreign investors into government bonds and equities and provided public sector units time-bound incentives to raise external commercial borrowings (ECBs). It also agreed to bear the hedging cost on fresh three-to-five-year FCNR (B) deposits.
ECBs are commercial loans raised by eligible resident entities from recognised non-resident lenders, and used by Indian corporations and public sector undertakings (PSUs) to access foreign capital. FCNR (B), or foreign currency non-resident bank deposit, is a fixed-term account offered by Indian banks that allows non-resident Indians, persons of Indian origin and overseas citizens of India to park their overseas earnings in stable foreign currencies in India.
The RBI will provide a concessional foreign exchange swap facility until September 30 this year in order to encourage ECBs by public sector firms. It is lowering the hedging and funding cost of borrowing in foreign currency by PSUs, which will enable them to raise cheaper funds from overseas, as per media reports. Meanwhile, the Monetary Policy Committee of the RBI has maintained a status quo on the repo rate (the rate at which RBI lends to commercial banks).
The Centre complemented the RBI’s measures with steps aimed at easing investments into the country and strengthening the rupee. To deepen the capital market, it has introduced a series of reforms to increase FPI participation in government securities (G-Secs). Key measures include tax exemptions on interest income, long-term capital gains (LTCG) and short-term capital gains (STCG), expansion of specified securities under the fully accessible route (FAR), and streamlined investment norms.
The government scrapped the LTCG and withholding tax on interest earned on government securities held by FPIs. Foreign investors had to pay 12.5 per cent LTCG tax on listed shares and bonds held longer than 12 months, and a withholding tax of 20 per cent on interest earned on G-secs.
The Centre had raised the LTCG tax rate on most assets to 12.5 per cent (from 10 per cent) in the July 2024 Union Budget.
The reforms aim to attract stable long-term foreign capital, deepen the G-Sec market, and strengthen India’s debt market by broadening and diversifying the investor base, the Centre said. “Greater foreign participation will provide an additional source of funding for infrastructure, manufacturing, urban development, climate initiatives and other national priorities. It will also improve market liquidity and price discovery, support the development of a smoother yield curve, reduce government borrowing costs, strengthen financial market benchmarks and enhance the transmission of monetary policy across the economy,” the government said in a statement.
The reforms are poised to attract long-term institutional investors, such as pension funds, insurance companies and sovereign wealth funds, leading to more stable and sustained capital inflows. They are also expected to boost foreign exchange inflows and strengthen the resilience of India’s financial markets, the statement added.
RBI governor Sanjay Malhotra said: “As a result of these measures on FCNR (B) and ECBs, and initiatives taken by the government on bonds and trade agreements, we are confident of a very healthy balance of payments, compared to what would have been otherwise.”
Experts said these steps should help enhance capital inflows, deepen bond markets, improve liquidity and provide support to the rupee. The rupee strengthened following the measures and, on June 7, stood at 94.95 to a dollar.
“The reforms announced [on June 5] pivot it to a progressive and daring stand, one that augurs well for the economy and markets while keeping the growth momentum sacrosanct,” said Soumya Kanti Ghosh, group chief economic advisor, Stata Bank of India. “Reforms in the FAR category and general category are likely to pull much better flows, in sync with the government of India’s measures facilitating better post-tax returns for FPIs.”
By putting new 15, 30 and 40-year G-sec under FAR, the RBI has made more long-tenor bonds freely accessible to foreign investors. “Further, it should ensure higher FPI demand for G-secs, lower long-end yields, lower government borrowing cost, better liquidity in long-tenor bonds, and concomitant support for the rupee while offering tax incentives of around Rs 4,000-5,000 crore for FPIs,” Kanti Ghosh added.
Concessional forex swap to incentivise ECB issuances by PSUs should accelerate such offerings by PSUs in overseas markets, helping them access funds at competitive net pricing and upend the total ECB/FCCB (foreign currency convertible bond) flows that fell by nearly 30 per cent in FY26 to $42.9 billion from the FY25 level ($61.2 billion).
Meanwhile, the Centre has said that India’s GDP growth has been 7.7 per cent in FY26, slightly higher than the 7.6 per cent estimated in February.
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