Foreign Buying Of Indian Bonds Hits Record After Tax Break: Report

India's bonds open to unrestricted global investment attracted a record monthly inflow after the government scrapped taxes on foreign investors.

Foreign funds bought 418 billion rupees ($4.4 billion) of debt under the so-called fully accessible route last month, according to Clearing Corp. of India Ltd. data. That's almost double the previous monthly record of 239 billion rupees set in August 2024.

The surge follows the government's June 5 decision to cut taxes on capital gains and interest income on bonds, removing one of the last barriers for global funds investing in India's sovereign debt. Addition of new bonds in the FAR category also boosted the debt's attractiveness. Sustained flows could help ease financing costs for the government and support the rupee as the dollar rallies. 

"The number of steps - tax cuts, currency stability, delayed hike expectations and receding fiscal risks - may have all given a good reason for foreign investors to purchase Indian bonds," said Dhiraj Nim, an economist at Australia & New Zealand Banking Group. The surge in inflows, however, may not sustain "if global financial conditions and US rates continue to tighten."

The purchases signal a rebound for the South Asian market after months of weakness. The shift is visible in other corners of the market too. Indian stocks outperformed emerging-market peers in June, while the rupee was Asia's second-best currency during the period.

Photo Credit: Bloomberg

India is resisting rate hikes seen in regional peers such as Indonesia and the Philippines, supporting bonds as the benchmark 10-year yield fell 25 basis points in June, the most in six years. Reserve Bank of India Governor Sanjay Malhotra said last week it's "premature" to discuss tightening, adding policymakers would have adopted a more hawkish stance at the June meeting if they believed higher rates were needed.

Pictet Asset Management and Neuberger Berman Group LLC are looking to add exposure to Indian debt, while M&G Investments has turned more positive after the latest steps. The debt inflows have helped somewhat cushion record outflows from equities of nearly $30 billion so far this year. The rupee has also gained more than 2% since it fell to a record low of near 97 per dollar in May.

To be sure, June's CCIL data were boosted by the addition of more securities to the FAR category. Existing foreign holdings in those bonds were reclassified into the eligible category, inflating the monthly increase, suggesting inflows may moderate in the coming months.

The broader trend still points to rising overseas participation in India's bond market. The moves by authorities will likely make India's eventual inclusion in the Bloomberg Global Aggregate Index increasingly "a question of timing rather than direction," Goldman analysts led by Danny Suwanapruti wrote in a note. 

It may prompt around $15 billion of passive inflows over the phase-in period, the analysts wrote. Bloomberg Index Services Ltd. has said it will provide a further update on India's inclusion by mid-2026.

Bloomberg LP, which offers index products for various asset classes through BISL, is the parent company of Bloomberg News.

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