Mumbai: India has removed some of the biggest hurdles cited by Bloomberg Index Services to including sovereign debt in its Global Aggregate Bond Index, but weak investor appetite, elevated hedging costs and concerns over the rupee's slide could still keep the country out of one of the world’s most influential bond benchmarks, market participants said.
The government and the Reserve Bank of India (RBI) on Friday unveiled a slew of measures aimed at attracting foreign capital, including tax exemptions for foreign portfolio investors (FPIs), an expansion of the universe of securities eligible under Fully Accessible Route (FAR) and steps to facilitate overseas investment into Indian debt markets.
The government 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. A similar income-tax exemption has been granted to the Bank for International Settlements (BIS).
“The tax compliance issue has gone and they’ve also increased the FAR securities universe. So, it does definitely increase the chance of us being included in the index,” said Gaura Sengupta, chief economist at IDFC First Bank.
Among the key steps, the RBI expanded the universe of securities eligible under FAR, which allows foreign investors to invest in designated G-sec without quantitative restrictions, to include all new issuances of 15-year, 30-year and 40-year government bonds.
Decision deferred
While the measures address several operational hurdles flagged by Bloomberg when it deferred a decision on India’s inclusion in January, market participants said the focus has now shifted from market access to whether global investors see sufficient value in Indian government bonds.
The next major review update for the Bloomberg Global Aggregate Index is scheduled in mid-2026. As of now, India is a part of JP Morgan Global Bond Index-Emerging Markets since June 2024, Bloomberg’s EM Local Currency Government Index since January 2025 and the FTSE Russell Emerging Market Index since September 2025.
The larger challenge may no longer be operational but economic. Inclusion in Bloomberg’s aggregate index is ultimately driven by recommendations from an advisory committee comprising global fund managers.
“When your G-Sec (government securities), if you fully hedge it, is 3.85%, why would a fund manager request that India’s paper be added?” a senior economist at a private sector bank said on condition of anonymity. “The increase in FAR and the tax changes address the earlier concerns. But will the proposal be made? That’s the biggest impediment.”
He said elevated currency hedging costs and persistent concerns over the Indian rupee’s trajectory have reduced the attractiveness of Indian bonds relative to US Treasury yields and other alternatives.
“Whether you hedge or don’t hedge, it’s a losing proposition. It’s not in the fund manager’s interest itself to recommend India as an inclusion in GAI (Global Aggregate Index) this year unless rates are much higher,” he said.
So far in the current financial year, debt inflows under FAR have amounted to $1 billion against $1.7 billion in FY26, National Securities Depository Ltd data showed.'
Not really a prerequisite
While the tax changes could also revive efforts to make Indian government bonds compatible with Euroclear, one of the world’s largest international securities settlement systems, some also said that Euroclear itself is not necessarily a prerequisite for Bloomberg inclusion.
Foreign banks and investors have long argued that Euroclear access would simplify investing in Indian bonds by allowing them to settle trades through infrastructure already used for sovereign debt markets globally.
“The Euroclear requirement was never there. So that’s not a stumbling block," a treasury official at a private bank said, adding that the focus has now shifted from market access to investor appetite.
The success of the broader package announced by the RBI and the government would also depend on how much foreign money actually flows into the country through newly liberalised channels.
“For the next three months' point of view, FCNR (foreign currency non-resident) deposits and the ECB (external commercial borrowing) window are quite relevant. We will see how much money comes in,” Neeraj Gambhir, executive director at Axis Bank, said.
Amid sustained pressure on the rupee, the RBI las week also announced steps to lower hedging costs and encourage overseas fundraising and foreign-currency deposits.
It will provide a concessional forex swap facility for public sector undertakings 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.
“We are still waiting for the full details of the FCNR and ECB schemes to see what level of flexibility is being provided to banks. That will determine the size of the flows," Gambhir said.