Foreign investors' appetite for Indian debt market has significantly surged with overseas investors investing nearly $2.68 billion (approx Rs 23,000 crore) in debt market instruments in India after a series of tax relief measures and liquidity-enhancing measures announced by the government and RBI. The inflows reflect increased investor confidence in the macroeconomic policies and outlook in India, one of the healthiest foreign debt investment levels in recent years.
Key Highlights
- Foreign investors infused $2.68 billion into Indian debt markets following tax and RBI reforms.
- Government tax relief and RBI measures boosted confidence, driving strong bond market inflows.
The boost follows the government's decision to eliminate capital gains tax and withholding tax on some foreign investments in government securities, which enhances profit after tax for foreign investors. The transfer was supported by measures taken by RBI for the foreign capital such as incentives for foreign currency deposits and measures to enhance the foreign access to debt market in India.
Foreign portfolio investors (FPIs) bought nearly Rs 15,895 crore in government securities in June, the most amount in almost 15 months, according to reports. The inflows picked up pace immediately after policy announcements, as investors saw Indian bonds as an attractive investment option in the backdrop of the prevailing uncertainties in the global economic environment, geopolitical tensions, and uncertainties around interest rate expectations in major economies.
Foreign Capital Flows Strengthen Bond Market
The demand for Indian debt has also been good for the bond market. The 10-year government bond yield fell from approximately 7.00% to almost 6.87%, as investors appeared to be growing more interested in government bonds. Fewer yields suggest increased demand and this may lead to the government holding fewer loans in the future, which may lower borrowing costs.
The actions have made India more attractive for the global fixed-income market, market participants believe, amid the capital flow volatility in several emerging markets. The relatively good growth prospects in India, the cooling down of inflation and the fiscal caution have further made the rupee assets attractive.
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The rupee appreciated in the month due to inflows of foreign capital in the debt market to neutralise external pressures to the detriment of the rupee, caused by high crude oil price and global market uncertainties.
In addition to the short-term capital inflows, analysts say that the policy adjustments may have a long-term effect as they would boost foreign interest in India's bond market and bolster the country's inclusion in global bond indices. Increased international investor participation is anticipated to increase market liquidity, enhance price discovery, and widen the investor base.
Despite the recent sluggish performance in the equity markets, India's debt market has shown promising signs of attracting continual investment from foreign investors, thanks to the supportive measures taken by the RBI and tax reforms by the government, which have made India one of the most attractive fixed-income investment avenues among emerging markets.
