FPI Buying on Tax Relief Sparks 0.10% Drop in Indian 10-Year Bond Yields

In recent trading sessions, Indian government bond yields have experienced a marked decline, with the benchmark 10-year yield falling by 0.10 percent to 6.911 percent, down from 7.024 percent observed on June 3. This substantial shift can be largely attributed to heightened foreign portfolio investor (FPI) inflows, which have surged to Rs 11,026.331 crore over four days. The government’s recent tax relief measures aimed at debt investments, particularly the promulgation of an ordinance amending the Income Tax Act, is a pivotal catalyst behind this trend. The new regulations provide a tax exemption on interest income and capital gains from government securities held by FPIs, retroactively valid from April 1, 2025, signaling a strategic effort to bolster foreign investment in the domestic debt market.

Market analysts credit the easing of government securities yields to the positive reception of these measures among foreign investors. With the introduction of the Fully Accessible Route (FAR), enabling non-resident investors to engage in specified Government of India dated securities without investment ceilings, market dynamics are shifting significantly. Notably, V Ramachandra Reddy, head of treasury at The Karur Vysya Bank, highlighted the substantial impact of both the government and Reserve Bank of India (RBI)’s initiatives, suggesting a concerted effort to attract foreign capital, which has, in turn, strengthened the bond market considerably.

Additionally, the RBI has unveiled a series of measures in the June monetary policy that are poised to broaden the investment landscape by expanding the range of securities available under the FAR. This includes new issuances of long-term government securities with tenors of 15, 30, and 40 years. According to an Ecowrap report from SBI’s Economic Research Department, these steps could facilitate significant capital inflows, estimated between USD 55-65 billion for the current fiscal year. Such inflows not only promise to stabilize the rupee but may also enhance India’s balance of payments position, further solidifying the attractiveness of the Indian debt market for international investors.

In summary, the Indian bond market is undergoing a transformative phase, propelled by legislative changes and monetary policy measures designed to attract foreign capital. The prospects for continued foreign inflows and an improved yield environment are promising, as both government support and RBI strategies converge to create a favorable investment atmosphere. Investors should closely monitor developments in foreign investment trends and potential impacts on yield movements, as these factors will substantially influence the market trajectory in the coming months.

Source: The Economic Times

(Expert Note: This report was prepared by the Wealthova team.)