India’s foreign investment reform package announced on Friday will stabilize the capital account, strengthen the rupee and improve liquidity and price discovery in the G-sec market, people familiar with the matter said on Saturday.
The Union Finance Ministry announced a number of measures to broaden investment options for foreign individuals and portfolio investors in Indian equities and made government bonds more attractive with tax concessions, while the Reserve Bank of India took monetary measures including hedging cost subvention for external commercial borrowings to boost forex inflows and support the rupee.
The rupee on Friday closed 56 paise higher at 95.18 against the US dollar, a result of coordination between the Finance Ministry and the RBI and their astuteness in responding to the volatile global economic situation. He said the impact is expected to last.
He said the policy responses of the Finance Ministry and the RBI have been well-coordinated and timely – this coordination was also reflected in the GDP data announced on Friday. Indian economy to register 7.7% GDP growth in 2025-26, cementing its position as the world’s fastest growing major economy. GDP growth rate in the fourth quarter was 7.8%, compared to 8.3% in the second quarter and 8.0% in the third.
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One of them said, “In an increasingly uncertain global environment fueled by West Asia conflicts, rising energy prices and trade disruptions, India has demonstrated remarkable macroeconomic resilience.”
Retail inflation remains within the tolerance range of the RBI. Headline CPI inflation rose to 3.48% in April from 3.4% in March – the highest in 13 months, but remained below the RBI’s 4% target and within the 2-6% tolerance band. He said thirty out of 36 states and union territories recorded inflation below 4%, indicating broad-based price stability.
He said India’s foreign exchange reserves stood at $682 billion as of June, which provides import cover for about 11 months. Gross FDI reached a historic peak of $94.5 billion in 2025-26, reflecting sustained long-term investor confidence, while net FDI turned strongly positive at $7.7 billion as against $1 billion last year. Services exports rose to $421.3 billion, an annual increase of 8.7% over FY26, with net services surplus rising 14.7% to $216.6 billion. He said merchandise exports rose 13.8% year-on-year to $43.6 billion in April 2026, the highest monthly value since March 2025.
The central aim of the reforms was to address a structural disadvantage that had made Indian government securities less competitive than comparable sovereign instruments in emerging markets, the person cited in the first instance said. The current tax treatment of FII interest and capital gains income reduces the effective after-tax yield on Indian G-Secs relative to those instruments, many of which are already market index constituents.
India’s government securities market has grown significantly in size and sophistication, but deepening it remains a key policy priority. A deeper and more liquid G-Sec market reduces sovereign borrowing costs, strengthens monetary policy transmission, broadens the financing base for the government’s capital spending program, and enhances overall macroeconomic resilience, the person explained.
India is also actively pursuing inclusion of its G-Secs in major global bond indices, including the Bloomberg Emerging Markets Local Currency Government Bond Index. Index inclusion will open up a large and predictable pool of passive capital flows from index-tracking funds globally, in addition to attracting greater participation from active international bond investors. The two objectives — deepening the G-Sec market and achieving global index eligibility — are mutually reinforcing: A more accessible market supports the case for index inclusion, while index inclusion drives broader-based foreign participation that deepens the market, the person explained.
Accordingly, the Government has proposed to exempt from total income any income by way of interest or capital gains arising to FIIs from investments in government securities. The exemption will improve the after-tax attractiveness of Indian government securities, support secondary market liquidity and price discovery, and demonstrate a long-term policy commitment to opening up the sovereign bond market to international capital – an essential step towards meeting the standards expected by global index providers.
A separate exemption has been proposed for the Bank for International Settlements on income arising from investments in Indian government securities through rupee-denominated investment pools. The participation of BIS will facilitate investment in Indian G-Secs from global central banks, a category of investors that is valued for its long-term, stable and non-speculative character.
The central bank’s participation in the sovereign bond market is widely considered a sign of institutional credibility and maturity, and signals to other global institutional investors and index compilers that the Indian G-Sec market meets international standards of access and investor protection, people with knowledge of the matter said.
“These measures demonstrate a clear and credible policy intention to align India’s sovereign bond market with international standards, which is a prerequisite for serious consideration by global index providers,” one of the people said. He said the removal of tax burden on FII income from G-Secs puts Indian sovereign bonds at par with comparable instruments in emerging markets that are already part of global indices.