The surge in inflows followed the government's June 5 announcement that lowered the tax burden on capital gains and bond interest, removing a major hurdle for global investors in Indian sovereign debt. Additionally, the inclusion of new securities in the FAR category enhanced the bonds' appeal.
Asset managers such as Pictet Asset Management and Neuberger Berman Group LLC are seeking to increase their exposure to Indian sovereign bonds, while M&G Investments has turned more positive after the latest steps.
Economist Dhiraj Nim of Australia & New Zealand Banking Group noted that the combination of tax cuts, currency stability, delayed hike expectations, and receding fiscal risks likely provided a strong incentive for foreign investors to buy Indian bonds. Nim also warned that this influx might not last "if global financial conditions and US rates continue to tighten."
Get your free investing masterclass bonus when you join Market Briefs, our free daily newsletter
Unlike neighboring countries like Indonesia and the Philippines, India has held off on raising rates, which has boosted bond prices. Sanjay Malhotra, governor of the Reserve Bank of India, stated last week that it's "premature" to consider tightening, noting that policymakers would have taken a more aggressive stand in June if they thought rate hikes were necessary.
The debt inflows have helped somewhat cushion record outflows from equities of nearly $30 billion so far this year. The rupee has also gained more than 2% since it fell to a record low of near 97 per dollar in May.
To be sure, June's CCIL data were boosted by the addition of more securities to the FAR category. Existing foreign holdings in those bonds were reclassified into the eligible category, inflating the monthly increase, suggesting inflows may moderate in the coming months.
The broader trend still points to rising overseas participation in India's bond market. In a note, Goldman Sachs analysts headed by Danny Suwanapruti stated that the authorities' actions would likely make India's eventual inclusion in the Bloomberg Global Aggregate Index increasingly "a question of timing rather than direction." They estimated that this could generate approximately $15 billion in passive inflows during the phase-in period.
Bloomberg Index Services Ltd. plans to give another update on India's inclusion by mid-2026. Bloomberg LP, the parent company of Bloomberg News, provides index offerings for multiple asset classes via BISL.
India has been gradually opening its bond market to foreign investors since the introduction of the Fully Accessible Route (FAR) in 2020, which allows non-residents to invest in specified government securities without any limits. The latest tax cuts are seen as another step toward deeper integration with global financial markets. This policy divergence, combined with the potential for index inclusion, has made Indian debt increasingly attractive to global portfolio managers.
Subscribe to Market Briefs, our free daily newsletter, and claim your bonus investing masterclass
