Income tax relief impact? Foreign investors flock to Indian bonds, pump record ₹25,800 crore in June

Foreign investors pumped a record nearly ₹25,800 crore (about $3 billion) into Indian government bonds in June, marking the highest monthly inflow on record, according to reports.

The surge was driven by the government's decision to remove taxes on foreign bond investments and renewed optimism over India's potential inclusion in a major global bond index.

Data from the clearing house showed that overseas investors purchased a net ₹25,800 crore worth of government securities under the Fully Accessible Route (FAR) during June, sharply higher than the combined ₹14,600 crore (around $1.7 billion) invested between January and May.

Tax reforms and RBI measures boost sentiment

The buying momentum accelerated after the government exempted foreign investors from the 12.5% long-term capital gains tax on government bonds and abolished the 20% withholding tax on bond interest income. In addition, the Reserve Bank of India (RBI) expanded the list of securities eligible under the FAR framework to include longer-tenor sovereign bonds.

"The removal of taxation on Indian government bonds will mechanically make them more attractive for global investors and help redirect flows towards the onshore market," Niel Clement, Portfolio Manager for Emerging Market Fixed Income at BNP Paribas Asset Management, told Reuters.

Bloomberg index inclusion expectations strengthen

According to Jennifer Taylor, Head of Emerging Market Debt at State Street Investment Management, the tax changes have eased operational hurdles for foreign investors and strengthened expectations that India's inclusion in the Bloomberg Global Aggregate Bond Index is drawing closer.

Lower crude prices add to India's appeal

Reuters noted that the sharp decline in crude oil prices has further improved the outlook for Indian debt. Brent crude has fallen more than 20% this month, retreating to pre-Iran conflict levels, easing concerns over India's inflation and current account deficit.

"The reforms are bearing fruit, with inflows picking up," Lavanya Venkateswaran, Executive Director and Senior ASEAN & India Economist at OCBC Bank, told Reuters, adding that she expects foreign inflows to remain strong as policy reforms continue and external headwinds ease.

Treasury Bills also see record buying

The Reuters report added that treasury bills also witnessed record foreign buying in June. Overseas investors now hold around ₹12,500 crore in India's treasury bills, with almost the entire accumulation occurring during the month, highlighting a growing appetite for Indian fixed-income assets.

(With inputs from agencies)

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