Foreign investment reforms to ease flux in capital account

INdia’s parcel of strange investment funds reforms proclaimed on fri will provide capital account stability, strengthen the rupee, and improve liquidity and price discovery in the G-Sec market, people aware of the matter said on Saturday.The Union finance ministry announced a series of measures to widen investment options for foreign individuals and portfolio investors in Indian equities and made government bonds more attractive with tax concessions, while the Reserve Bank of India took monetary measures including hedging cost subvention for external commercial borrowings to boost foreign exchange inflows and support the rupee.The outcome of the coordination between the finance ministry and the RBI, and their nimbleness in responding to a volatile global economic situation, was reflected in the rupee appreciating 56 paise to close at 95.18 against the US dollar on Friday. The impact is expected to sustain, they added.The finance ministry and the RBI’s policy responses have been well coordinated and timely, they said — a coordination also reflected in the GDP numbers announced on Friday. The Indian economy recorded 7.7% GDP growth in 2025-26, cementing its position as the world’s fastest-growing major economy. GDP growth in the fourth quarter stood at 7.8%, building on 8.3% in the second quarter and 8.0% in the third.“In an increasingly uncertain global environment marked by the West Asia conflict, elevated energy prices, and trade disruptions, India has demonstrated remarkable macroeconomic resilience,” one of them said.Retail inflation remained within the RBI’s tolerance band. Headline CPI inflation rose to 3.48% in April — the highest in 13 months — from 3.4% in March, but remained below the RBI’s 4% target and within the 2-6% tolerance band. Thirty of 36 states and union territories recorded inflation below 4%, indicating broad-based price stability, they said.India’s forex reserves stood at $682 billion as of June, providing import cover of approximately 11 months, they said. Gross FDI reached a historical peak of $94.5 billion in 2025-26, reflecting continued long-term investor confidence, while net FDI turned strongly positive at $7.7 billion against $1 billion the previous year. Services exports surged to $421.3 billion, an annualised growth of 8.7% in FY26, with the net services surplus growing 14.7% to $216.6 billion. Merchandise exports grew an annualised 13.8% to $43.6 billion in April 2026, the highest monthly value since March 2025, they added.The central objective of the reforms, the person cited in the first instance said, was to address a structural disadvantage that had kept Indian G-Secs less competitive than comparable sovereign instruments in peer emerging markets. The current tax treatment of FII interest and capital gains income reduces the effective post-tax yield on Indian G-Secs relative to those instruments, many of whose markets are already index constituents.India’s government securities market has grown significantly in size and sophistication, but further deepening remains a key policy priority. A deeper and more liquid G-Sec market reduces the cost of sovereign borrowing, strengthens monetary policy transmission, broadens the financing base for the government’s capital expenditure programme, and enhances overall macroeconomic resilience, the person explained.India has also been actively pursuing inclusion of its G-Secs in major global bond indices, including the Bloomberg Emerging Market Local Currency Government Bond Index. Index inclusion would unlock a substantial and predictable pool of passive capital flows from index-tracking funds globally, in addition to attracting greater participation from active international bond investors. The two objectives — deepening the G-Sec market and achieving global index eligibility — are mutually reinforcing: a more accessible market supports the case for index inclusion, while index inclusion drives the broad-based foreign participation that deepens the market, the person explained.The government has accordingly proposed to exempt from total income any income by way of interest or capital gains arising to FIIs from investments in government securities. The exemption would improve the post-tax attractiveness of Indian G-Secs, support secondary market liquidity and price discovery, and demonstrate a long-term policy commitment to opening the sovereign bond market to international capital — a necessary step toward meeting the standards expected by global index providers.A separate exemption has been proposed for the Bank for International Settlements on income arising from investments in Indian G-Secs through a rupee-denominated investment pool. BIS participation would facilitate investment from global central banks into Indian G-Secs, a category of investor valued for its long-term, stable and non-speculative character.Central bank participation in a sovereign bond market is widely regarded as a mark of institutional credibility and maturity, and signals to other global institutional investors and index compilers that the Indian G-Sec market meets international standards of accessibility and investor protection, the people aware of the matter added.“These measures demonstrate a clear and credible policy intent to align India’s sovereign bond market with international standards, a prerequisite for serious consideration by global index providers,” one of the people said, adding that removing the tax burden on FII income from G-Secs places Indian sovereign bonds on a more level footing with comparable instruments in peer emerging markets that are already part of global indices.