India's government bond market is witnessing renewed interest from global investors after the Centre introduced a series of reforms aimed at making the country's debt market more attractive. The policy changes such as elimination of taxes on selected government bond investments for foreign portfolio investors (FPIs), relaxing ownership norms and measures to improve the performance of the rupee have resulted in a renewed buying spree by international funds into India's debt market. 

Key Highlights

• Foreign investors infused Rs 32,630 crore into Indian government bonds after tax reforms and relaxed investment norms.
• RBI measures and tax exemptions strengthen rupee, boosting India's appeal among global bond investors.

Since the reforms announced on June 5, foreign investments in index-eligible government bonds have grown by around Rs 32,630 crore ($3.5 billion) based on the latest data from the Clearing Corporation of India (CCIL), the central depository for securities. Some of the growth is as a result of the new Fully Accessible Route (FAR) where foreign investors are able to participate in the market.

There has been a positive change in outlook for the Indian bond market with several global asset managers becoming more bullish. The investment companies, such as Pictet Asset Management, Neuberger Berman and M&G Investments, have already announced plans to boost their interest in Indian government securities.

Commenting on India's improving investment appeal, Low Guan Yi, Head of Asia Fixed Income at M&G Investments said, "India now looks better differentiated from other emerging bond markets, where policy flexibility and credibility are more constrained."

Tax Reforms Improve India's Appeal

The government last month announced that foreign investors will not be liable for tax on interest and capital gains from qualified government securities. It also eliminated certain investment limitations and increased the number of bonds available on the FAR route. At the same time, the Reserve Bank of India (RBI) has announced steps to help overseas borrowings and non-resident deposits provide "hedging" to foreign capital inflows and stabilize the rupee, which were being disrupted by hedging costs.

Deloitte India said the tax exemption alone will increase the returns for foreign investors by almost 15-20% after tax from investing in Indian government bonds, making them more appealing.

Rupee Stabilizes as Bond Inflows Increase

The policy measures have also contributed to the recovery of the Indian rupee which hit a record low last month on the back of high import prices of crude oil and significant foreign equity outflows. Since then, the currency has rallied and yields on government bonds have eased with a return in investor confidence.

Carrie Liaw, Senior Investment Manager for Emerging Market Fixed Income at Pictet Asset Management said, "We see scope for increased allocation as India offers a relatively high-yielding, lower-beta alternative to some other EM markets."

The reforms also give India better chances to get admitted to large global indices, like Bloomberg Global Aggregate Index, industry experts believe, which could bring in much more foreign investment in the future in the Indian bond market.

Also Read: India Unveils Tax Breaks and Bond Reforms to Attract Capital

Geopolitical Risks Still on Investors' Radar

However, amid the rising hopes, some global investors are still hesitant to make investment decisions because of the geopolitical uncertainty, especially the tensions escalating in the Middle East.

Asian Sovereign Debt's Kenneth Akintewe noted, "It's good in the medium to long term, but some risk in the Middle East is here and will provide buying opportunities over the next couple of months."

India is emerging as one of the most appealing fixed-income destinations in emerging markets amid favorable policy measures to make the market more accessible. Ongoing policy support, stable macroeconomic indicators and possible bond index inclusion in the rest of the world should ensure even greater participation from overseas investors in the next few months.