The world's fifth-biggest economy is trying to make its bond market look more like everyone else's.
India is weighing a significant cut to the taxes overseas investors pay on its government bonds. The Reserve Bank of India recommended the move, and India's Finance Ministry is actively reviewing it.
The rupee jumped on the news, and so did Indian government bonds.
The Indian rupee is Asia's worst-performing currency this year, down more than 6% against the US dollar. Authorities want to bring more foreign cash in to support it.
Right now, overseas buyers face two layers of tax on Indian bonds. They pay capital gains tax that depends on how long they hold the bond, and they pay roughly 20% on interest income from bond coupon payments - the regular payments bondholders get from the issuer.
A 5% lower rate on interest income used to exist, but it ended in 2023, and foreign buying has not picked up since.
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Overseas investors hold only 3% of India's $1.3 trillion government bond market, which is unusually low for an economy of India's size. India's policymakers know it, and they have been trying to change it.
India has spent the past two years getting its bonds included in major global benchmarks like JPMorgan's emerging market bond index and FTSE Russell indices, but tax remains the friction point investors point to most.
Indian government bonds rallied on the report, with the benchmark 10-year yield falling as much as five basis points - hundredths of a percent - to 7% before settling slightly higher.
Edwin Gutierrez of Aberdeen Investments told Bloomberg the proposal is a positive step, though he warned that broader inflation worries are still weighing on sentiment toward Indian debt.
Nothing is final yet, since the Finance Ministry has not formally approved a cut and India's budget cycle could shape when the change actually takes effect.
The bottom line: if it gets through, expect India's bonds to keep drawing in foreign cash and the rupee to find a steadier footing.
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