Foreign Portfolio Investors (FPIs) have pumped a record ₹33,000 crore into Indian government securities (G-Secs) so far in June.

The massive injection marks the highest monthly investment in this category on record, pacing six times higher than the ₹5,512 crore brought in during May. The sudden influx marks a striking divergence in foreign investor behavior: while FPIs continue to aggressively dump Indian equities (withdrawing over ₹62,800 crore in the first half of June alone), they are rapidly pivoting to the domestic debt market.

The Catalyst: A Massive Government Policy Shift

The primary trigger for this unprecedented bond buying was a sweeping structural overhaul announced by the Centre and the Reserve Bank of India on June 5. To make Indian debt highly attractive globally, the government aggressively dismantled long-standing tax and regulatory barriers:

• Complete Tax Elimination: The government completely exempted FPIs from paying short-term and long-term capital gains tax on the sale or transfer of G-Secs. More importantly, it completely scrapped the 20% withholding tax on interest income.
• Scrapping Investment Caps: The policy merged the separate “general” and “long-term” sub-categories into a unified investment limit. It also eliminated structural constraints like the short-term investment limit, security-wise limits, and concentration limits for FPIs investing in government bonds.
• Widening the “FAR” Window: The list of bonds under the Fully Accessible Route (FAR)—which permits unlimited foreign ownership—was expanded to include ultra-long 15, 30, and 40-year tenors, alongside sovereign green bonds.

Macro Impact: Rupee Relief and Index Inclusions

By waiving these taxes, the exchequer is absorbing an estimated near-term revenue hit of roughly ₹10,000 crore this fiscal year. However, economists and treasury heads note that the long-term structural gains far outweigh the cost:

1. Stabilizing the Capital Account

With India’s equities experiencing a record-setting ₹2.2 lakh crore exit by foreign investors so far this year, the rupee has faced steady depreciation pressure. The massive ₹33,000 crore bond inflow acts as a vital counterweight, helping to bridge the current account deficit, bring in steady dollars, and provide a buffer for the local currency.

2. Pushing Bond Yields Lower

Heavy institutional buying pushes bond prices up, which naturally drives yields lower. This provides an excellent window for corporate and sovereign borrowing costs in India to cool down, flattening the broader yield curve.

3. Setting Up Global Index Benchmarks

The aggressive removal of withholding and capital gains taxes directly addresses the primary grievances global index providers historically flagged regarding Indian debt. By making the FAR window completely tax-efficient and quasi-open, India is positioning its sovereign debt to easily transition into major global benchmarks like the Bloomberg Global Aggregate Index, which analysts predict could trigger an additional $20 billion to $30 billion in steady, passive foreign inflows over the coming year.