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Why in News

India has announced a package of tax and access reforms to draw Foreign Portfolio Investors (FPIs) into Government Securities (G-Secs). The reforms, reported in early June 2026 with the income exemptions applying with effect from the start of FY2026-27 (April 2026), exempt FPIs from tax on interest and capital gains from specified G-Secs and expand the Fully Accessible Route (FAR) to cover long-tenor bonds and Sovereign Green Bonds. The aim is to deepen India’s bond market and attract stable, long-term foreign capital.

What the Reforms Do

Reform Detail
Capital gains tax Exempted for FPIs on specified G-Secs (long-term and short-term)
Withholding tax on interest Eliminated on interest income from these G-Secs
Fully Accessible Route (FAR) Expanded to include new 15-year, 30-year and 40-year G-Secs and Sovereign Green Bonds
Investment limits Short-term, concentration and security-wise limits removed for FPIs in FAR G-Secs
Effective Income exemptions from April 2026 (FY2026-27)

Key Concepts Explained

Term Meaning
Government Securities (G-Secs) Debt instruments issued by the RBI on behalf of the Government of India to borrow money; considered risk-free sovereign debt
Foreign Portfolio Investor (FPI) A foreign investor holding financial assets (bonds, equities) without controlling stakes
Fully Accessible Route (FAR) A channel (introduced by the RBI in 2020) that lets non-residents invest in specified G-Secs with no investment ceiling
Sovereign Green Bonds (SGrBs) Government bonds whose proceeds fund green and climate-friendly projects

Why India Wants Foreign Money in Its Bonds

1. Deepening the bond market. A broader, more diverse investor base makes the government-debt market deeper and more liquid, lowering borrowing costs.

2. Global bond-index inclusion. Easing access supports India’s inclusion in global bond indices (such as the JPMorgan emerging-market index), which channels large, passive foreign inflows.

3. Reducing crowding out. If the government can borrow more from foreign investors, it competes less with private firms for domestic savings, leaving more credit for the private sector.

4. Long-term capital. Long-tenor bonds (30 and 40 years) attract patient, stable investors like pension funds, rather than volatile “hot money.”

The Risks to Manage

A UPSC-grade answer flags the trade-offs:

  • Capital-flow volatility: larger foreign holdings of debt can mean sharper outflows during global shocks, pressuring the rupee.
  • Exchange-rate exposure: foreign investors are sensitive to currency movements and interest-rate differentials.
  • Sovereignty of policy: heavy foreign ownership of debt can constrain domestic policy space.

The reforms therefore aim to attract stable, long-term capital while managing the risks of sudden reversals.

UPSC Relevance

Prelims

  • India exempted FPIs from tax on interest and capital gains from specified G-Secs; expanded the Fully Accessible Route (FAR)
  • FAR (introduced by the RBI in 2020) allows non-residents to invest in specified G-Secs with no ceiling
  • FAR expanded to include 15, 30 and 40-year G-Secs and Sovereign Green Bonds
  • G-Secs are issued by the RBI on behalf of the Government of India
  • Supports India’s inclusion in global bond indices

Mains Angles

  1. GS3 Capital Markets: Examine how easing FPI access to G-Secs deepens India’s bond market, and the risks of capital-flow volatility.
  2. GS3 Government Borrowing: Discuss the benefits of global bond-index inclusion and reduced crowding-out of private borrowers.
  3. GS3 Financial Stability: Analyse the balance between attracting foreign capital and preserving macroeconomic and policy stability.

Facts Corner

Fact Detail
Reform FPI tax exemption on G-Sec interest and capital gains
Access Fully Accessible Route (FAR) expanded
FAR introduced 2020 (by the RBI)
FAR additions 15, 30, 40-year G-Secs; Sovereign Green Bonds
G-Secs issued by RBI on behalf of the Government of India
Effective Income exemptions from April 2026 (FY2026-27)
Goal Deepen bond market; bond-index inclusion; long-term capital
Risk Capital-flow volatility; rupee exposure

Sources: Business Standard, RBI, Ministry of Finance

Source: India Eases Taxes for Foreign Investors in Government Securities — Ujiyari.com | Free UPSC & State PCS Current Affairs