Foreign investors sweeten on Indian government bonds as equities see a sell-off
Billboard of SBI Funds Management Ltd. during a press conference held in Mumbai, India, on Thursday, July 9, 2026.
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Foreign investors appear to have been negatively impacted by Indian equities, but are increasingly bullish on the country’s bonds ahead of a possible inclusion in the Bloomberg Global Aggregate Bond Index.
Experts said India removed the tax on overseas bond investors last month, paving the way for its inclusion in the Bloomberg Index and is seeking to attract foreign capital. While an update on this is expected soon, actual engagement is expected to occur in early 2027.
DBS Bank head of treasury Ashish Vaidya said on CNBC’s “Inside India” last week that India could have a weighting of around 0.7% in the index, which is estimated to lead to an inflow of “$25 billion to $27 billion” by fiscal 2028.
foreign investors I bought So far this year, India’s debt stands at $7.7 billion, surpassing the $6.6 billion in all of 2025, according to data from Indian depository institution NSDL.
And $5.8 billion of those inflows came in June, just after India cut its 12.5% long-term capital gains tax and 20% withholding tax on interest income for foreign investors buying government bonds.
Meanwhile, foreign investors have sold direct stocks worth $27.6 billion so far in 2026 as Indian stocks lose their appeal due to AI-driven momentum in global markets.
India also included government bonds of 15, 30 and 40 years maturity under the “fully accessible route” with no investment cap on purchases. In June, $2.3 billion monthly foreign inflows came into India under the fully accessible route; This was the highest figure in the last 14 months.
Expanding the FAR bond universe to include longer-term issues could attract interest from foreign insurance and pension funds with “longer-term demand,” HSBC said in a note last month.
The tax exemption for foreign investors buying Indian government bonds is “truly a game changer,” Tanveer Sethi, senior vice president of investment management at Kotak Mahindra Asset Management Singapore, told CNBC.
Inclusion in the index is a “natural and intended consequence of tax reform,” he said, adding that current inflows are coming from tactical investors and a few active investors who took positions before inclusion.
Experts said that once included in the index, some of this money will change hands from tactical investors to passive investors.
positive for rupee
Stock outflows, coupled with a rising import bill due to high global oil prices, have put pressure on government finances and the rupee.
India’s balance of payments deficit widened $23.6 billion in fiscal year It expires in March 2026, down from $5 billion a year ago. Budget deficit in April and May It was 11 billion dollars due to ongoing capital outflows and shocks in energy prices. Bond inflows will help narrow this gap and support the rupee.
The inclusion of Indian bonds in the JPMorgan Government Bond Index-Emerging Markets (GBI-EM) in 2024 results in net inflows of up to $20 billion, Gaura Sengupta, chief economist at IDFC First Bank of India, told CNBC.
He added that unlike the earlier situation, the Bloomberg Index includes both emerging and developed markets, so Indian bonds should stand out. Sengupta added that the move to remove the tax for overseas bond investors reduces compliance costs and improves ease of doing business.
Bloomberg is already laying the groundwork for the internationalization of India’s government bond market. Last week a “electronic commerce workflow” for Indian government bonds, which allows foreign portfolio investors “to access liquidity provided by international and domestic banks through the Bloomberg Terminal.”
