Mumbai: The Reserve Bank of India and the government on Friday simultaneously unveiled a slew of measures to draw foreign capital into local debt markets and support the rupee, amid persistent foreign portfolio outflows and rising global uncertainty.
The measures include wider access for foreign investors to government securities (G-sec), tax exemptions on investments in sovereign bonds, relaxed investment restrictions for foreign investors, and higher equity investment limits for overseas individuals.
Among the key steps, the RBI expanded the universe of securities eligible under the Fully Accessible Route (FAR) to include all new issuances of 15-year, 30-year and 40-year government securities. The government also made sovereign green bonds eligible under the FAR framework, which allows foreign investors to invest in designated G-sec without quantitative restrictions.
The government has also exempted FPIs from income tax on interest income and capital gains arising from investments in government securities. The exemption, effective 1 April 2026, will apply to all interest and capital gains earned by FPIs on G-Sec investments from that date onwards.
RBI has removed the sub-limits of short-term investment, concentration and individual securities on FPI investment under the general route, governor Sanjay Malhotra announced in his monetary policy speech.
The overall investment ceiling of 6% of outstanding central government securities and 2% of state government securities will continue. In addition, the existing ‘general’ and ‘long-term’ sub-categories of FPI limits will be merged into a single category for both central and state government securities.
“These measures, along with the tax benefits provided by the government this morning, should help attract foreign capital for government borrowing,” Malhotra said.
The tax exemption could raise FPI returns on Indian government bonds by 15-20%, making India more attractive to foreign investors and strengthening the case for global bond index participation, said Rajesh H. Gandhi, partner at Deloitte India. “The move should ease pressure on the rupee over the medium to longer term.”
The RBI and government delivered on a coordinated effort towards shoring up capital flows into Indian assets to ease the pressure on the rupee, said Sakshi Gupta, principal economist, HDFC Bank. These measures should help bridge the $40-50 billion gap in the balance of payments estimated for FY27, she added.
Vivek Iyer, partner and financial services risk leader, Grant Thornton Bharat said the measures announced by the RBI will fuel long-term growth support while also boosting foreign exchange reserves to deal with the increased currency volatility.
Equity investment reforms
The government and RBI also eased rules governing foreign investment in Indian equities. Individual Persons Resident Outside India (PROIs) will now be allowed to invest in listed Indian equities through the Portfolio Investment Scheme (PIS), a facility previously available only to Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs).
The government has also increased the investment cap for an individual PROI under the scheme to 10% of a company’s paid-up capital from the existing 5%, while the aggregate limit for all such investors has been raised to 24% from 10%. To operationalise the changes, the department of economic affairs is notifying the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026.
According to the finance ministry, the move will leverage existing onboarding systems for NRI and OCI investors, reduce compliance requirements and attract a broader pool of relatively stable foreign retail investors.
Measures to encourage dollar inflows
Amid sustained pressure on the rupee, the RBI also announced steps to lower hedging costs and encourage overseas fundraising and foreign-currency deposits.
A concessional forex swap facility will be provided for public sector undertakings (PSUs) raising funds through external commercial borrowings (ECBs) till 30 September 2026.
RBI will also bear the full hedging cost for authorised dealer banks mobilising fresh three-to-five-year Foreign Currency Non-Resident – Bank or FCNR(B) deposits till 30 September.
RBI also proposed restoring the time for realisation of export proceeds to nine months from the current window of 15 months, which would mean that exporters need to bring back their foreign currency earnings to India sooner.
Madhavi Arora, chief economist, Emkay Global Financial Services said these measures should help shore up the currency and could potentially lead to $30-50 billion of inflows in the year. “It is clear that the RBI will only raise rates now when inflation becomes entrenched and has second-round effects, with a clear delineation between monetary and FX policy.”
Foreign investors have sold $9.9 billion in Indian equities on a net basis so far in FY27.
So far this financial year, FPIs have been net sellers of $836 million in the general debt route and $490 million in the voluntary retention route (VRR), but net buyers of $448 million in the passive fully accessible route (FAR), as per NSDL data. Inflows through the last route are a result of Indian debt being included in Bloomberg and JP Morgan indices.