India is preparing a new set of measures aimed at drawing in overseas capital, including potential tax relief for foreign investors and simplified access to government bonds. According to a recent report, the Union Cabinet is expected to review these proposals as early as this week, which could substantially reduce the tax burden on foreign funds investing in Indian bonds.
Proposed Tax Reductions and Investment Reforms
Among the key measures under consideration is either the complete removal or a significant reduction of the existing 20% tax on interest income earned by overseas investors from Indian bonds. This move is part of a broader effort by Indian authorities to enhance the appeal of domestic debt markets to global investors and increase foreign capital inflows, especially as the Indian rupee has faced considerable pressure.
Separately, the Reserve Bank of India (RBI) is likely to expand the list of government securities available under the Fully Accessible Route (FAR). This proposed change would allow foreign investors to purchase certain long-duration sovereign bonds without any investment limits. The RBI last updated the FAR framework in 2024, at which point it had excluded 14-year and 30-year government securities from the list.
Context of Rupee Volatility and Economic Pressure
The policy push comes at a time when the Indian rupee has experienced significant volatility this year. The currency hit a record low against the US dollar on May 20 before recovering slightly due to central bank intervention and easing global crude oil prices. Factors contributing to the rupee's fluctuations include rising oil import costs, foreign portfolio outflows, global trade tensions, and geopolitical uncertainties.
In response to elevated external pressures, Prime Minister Narendra Modi has also urged citizens to conserve foreign exchange reserves. The government is also expected to notify rules that will permit Persons Resident Outside India (PROIs) to invest in shares of listed Indian companies through the Portfolio Investment Scheme, further widening investment opportunities for overseas individuals and deepening foreign participation in India's financial markets.
Both the Finance Ministry and the RBI reportedly did not comment on these proposals.