The foreign investment reform package India announced on Friday will provide capital account stability, 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 series of measures to expand investment options for foreign individuals and portfolio investors in Indian stocks and make government bonds more attractive with tax concessions, while the Reserve Bank of India has taken monetary measures including subsidizing hedging costs for external commercial loans to boost foreign exchange inflows and support the rupee.
The result of coordination between the Ministry of Finance and the Reserve Bank of India, and their intelligence in responding to the volatile global economic situation, was reflected in the appreciation of the rupee by 56 paise to close at 95.18 against the US dollar on Friday. They added that the impact is expected to continue.
They said the responses of the Finance Ministry and the Reserve Bank of India were well-coordinated and timely – coordination that was also reflected in the GDP numbers announced on Friday. The Indian economy recorded a GDP growth of 7.7% in the period 2025-2026, strengthening its position as the fastest growing major economy in the world. GDP growth in the fourth quarter reached 7.8%, based on 8.3% in the second quarter and 8.0% in the third quarter.
“In an increasingly uncertain global environment characterized by conflict in West Asia, rising energy prices, and trade disruptions, India has shown remarkable macroeconomic resilience,” one of them said.
Inflation in the retail sector remained within the RBI’s tolerance band. Headline CPI inflation rose to 3.48% in April – a 13-month high – from 3.4% in March, but remained below the Reserve Bank of India’s target of 4% and within a tolerance band of 2-6%. They said 30 states and union territories out of 36 recorded an inflation rate of less than 4%, indicating broad price stability.
India’s foreign exchange reserves stood at $682 billion as of June, providing a cover for imports for about 11 months, they said. Total FDI reached a historic peak of $94.5 billion in 2025-26, reflecting continued long-term investor confidence, while net FDI turned strongly positive at $7.7 billion versus $1 billion a year earlier. Services exports rose to $421.3 billion, with an annual growth of 8.7% in fiscal year 2026, with the net services surplus growing 14.7% to $216.6 billion. They added that merchandise exports grew by 13.8% year-on-year to $43.6 billion in April 2026, the highest monthly value since March 2025.
The main aim of the reforms is to address structural flaws that have made Indian G-Sec companies less competitive than similar sovereign vehicles in their emerging market counterparts, the person cited said. The current tax treatment of interest income and capital gains for FIIs lowers the effective after-tax return on Indian G-Secs relative to those instruments, many of whose markets are already components of the index.
India’s government securities market has grown significantly in size and sophistication, but its deepening remains a key policy priority. He explained that a deeper and more liquid G-Sec market reduces the cost of sovereign borrowing, enhances monetary policy transmission, expands the financing base for the government’s capital expenditure program, and enhances overall macroeconomic resilience.
India is also actively seeking inclusion of its G-Sec bonds in major global bond indices, including the Bloomberg Emerging Market Local Currency Government Bond Index. Index inclusion would open up a large and predictable pool of passive capital flows from index-tracking funds globally, as well as attracting greater participation from active international bond investors. The source explained that the two goals – deepening the G-Sec market and achieving global index eligibility – reinforce each other: an accessible market supports the case for index inclusion, while index inclusion drives widespread foreign participation that deepens the market.
Accordingly, the government proposed to exempt from gross income any income by way of interest or capital gains arising by FIIs from investments in government securities. The exemption would improve the after-tax attractiveness of Indian G-Secs, support secondary market liquidity and price discovery, and demonstrate a long-term political commitment to opening up the sovereign bond market to international capital – a necessary step towards meeting the standards expected by global index providers.
A separate exemption has been proposed for the BIS on income generated from investments in Indian G-Secs through a rupee-denominated investment pool. BIS participation would facilitate investment from global central banks in India’s G-Sec, a class of investors valued for its long-term, stable, and non-speculative nature.
The central bank’s participation in the sovereign bond market is widely viewed as a sign of institutional credibility and maturity, and signals to other global institutional investors and index aggregators that India’s G-Sec market meets international standards for accessibility and investor protection, the people familiar with the matter added.
“These measures demonstrate a clear and credible political intent to align the Indian sovereign bond market with international standards, which is a prerequisite for serious consideration by global index providers,” one of the people said, adding that removing the tax burden on investment division income from G-Secs puts Indian sovereign bonds on par with similar instruments in emerging market peers that are already part of global indices.
