Foreign Debt Inflows Hit 16-Month High As FIIs Add $1.84 Billion To Indian Bonds

Foreign institutional investors (FIIs) have invested $1.84 billion in Indian debt markets in June so far, marking the strongest monthly inflow in 16 months. The surge comes after the government removed capital gains tax and withholding tax on foreign investments in government securities, improving the appeal of Indian debt instruments for overseas investors.

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Data available till mid-June shows that foreign investors have already brought in nearly $1.9 billion within the first few trading sessions of the month. The inflow significantly exceeds the combined $130 million invested during April and May. In March 2025, FIIs had invested around $3.69 billion in Indian debt, which remains the last month to record higher inflows.

Tax Changes Boost Investor Interest

The turnaround follows policy announcements made on June 6 to encourage foreign participation in India’s bond market and support external capital inflows.

The government abolished long-term and short-term capital gains taxes on FII investments in government bonds. It also removed withholding tax on interest income earned from these securities. Earlier, foreign investors were subject to a 12.5% tax on long-term capital gains, a 30% tax on short-term gains and a withholding tax of about 20% on interest income.

The measures were introduced alongside steps by the Reserve Bank of India (RBI) to widen access to government securities under the Fully Accessible Route (FAR) and facilitate overseas funding through forex swap arrangements and FCNR deposit-related initiatives.

Bond Market Sees Immediate Impact

The renewed interest from foreign investors has coincided with gains in both the currency and bond markets. The Indian rupee has risen almost 1% against the U.S. dollar in June after declining 5.4% between January and May 2026. Government bond yields have also softened.

The benchmark 10-year government bond yield has declined to 6.87% from 7% at the end of May. Shorter-duration securities have recorded sharper moves, with the 5-year yield falling about 40 basis points and the 3-year yield dropping 38 basis points during the month.

Room For Further Foreign Participation

Market participants have highlighted that foreign holdings in government securities remain below permitted limits, leaving room for additional inflows. Apart from tax incentives, easing geopolitical tensions in West Asia and lower crude oil prices have improved the broader investment environment. The policy changes have also enhanced the relative attractiveness of Indian bonds compared with U.S. fixed-income assets by improving post-tax returns.

The recent inflows provide fresh support to India’s debt market at a time when authorities are seeking to strengthen external capital flows and deepen participation by global investors. Future investment trends will remain linked to global interest-rate movements, U.S. Federal Reserve policy decisions and overall risk sentiment, though India’s bond market continues to offer relatively attractive yields compared with many major economies.