India government bonds get a glow-up
In a major tax reform, India has removed both withholding and capital gains taxes for India government bonds (IGBs) for foreign investors, effective 1 April 2026. The measures are primarily meant to shore up the rupee and attract foreign capital.
Financial and operational burdens removed
With these tax announcements, India removes a structural disadvantage IGBs faced vs. other emerging market bonds. There will now be a material improvement in post-tax returns for foreign investors, as the previous tax rate ranged from 15–20%; also, the previous tax burdens came with a cumbersome operational process to file tax documents at the point of execution. For many foreign investors, removal of these hurdles could be a catalyst to increase holdings.
IGBs are already part of major emerging-market bond indices. Their phased inclusion in JPMorgan’s GBI-EM index was completed in March 2025, taking India to the index’s 10% country cap. Bloomberg added India to its Emerging Market Local Currency index in January 2025, where it is expected to account for about 7.3% on a market-value basis and reach the 10% cap in the capped version once fully phased in. FTSE Russell has also said India’s sovereign bonds will join its EMGBI from September 2025, with a projected weight of about 9–10%. The next milestone would be inclusion in the Bloomberg Global Aggregate Index, which would place India more firmly in the mainstream global fixed income universe. That has not yet happened: Bloomberg deferred a decision in January 2026 and said it would revisit the matter in mid-2026. If included, India could have a weight of about 0.7% in the Global Aggregate Index. We believe these recent tax and market-access reforms are likely to improve India’s case.
Ownership cap remains, but choice broadens
It should be noted that no changes were made to the foreign ownership cap of 6% of IGBs. However, foreign ownership remains low by EM standards, at around 2% of outstanding securities, leaving considerable room for overseas investors in India’s bond market, one of the largest in the emerging-market universe.
The authorities also broadened the pool of bonds available to foreign investors through the Fully Accessible Route (FAR), the framework that allows non-residents to invest in designated India government bonds without the usual investment caps. Until now, FAR-eligible securities were concentrated mainly in shorter- and medium-dated maturities. The latest change brings all new 15-, 30- and 40-year government bonds into the FAR universe, opening more of India’s longer end to overseas investors. Crucially, this expansion should also increase the availability of green bonds in the FAR bond spectrum. As new investors come into the market, we believe that the overall IGB curve will see improved liquidity and likely lower yields, with a bias toward gradual bull flattening.
Early market reaction has been constructive. Global funds bought about USD 469 million of index-eligible India bonds on 6 June, the largest daily inflow in nearly a year and the strongest since the previous round of bond-market reforms in June 2025.
Near-term support for the rupee
The RBI left rates unchanged at its 5 June meeting, but its tone left open the possibility of a hike in August if needed. Against that backdrop, the latest measures appear aimed at supporting the Indian rupee by improving the appeal of IGBs to foreign investors. That said, with the overall foreign ownership cap unchanged at 6% of total IGBs, the medium-term impact on market performance is likely to remain bounded. There could be a modest hit to direct tax revenues, but this may be offset over time if stronger demand helps lower government funding costs.