In a strategic move to counter heavy foreign portfolio investor (FPI) outflows, the Indian government is reportedly preparing significant tax relief for foreign bond investors. According to official sources, the Union Cabinet may soon slash or completely scrap the existing 20% withholding tax on interest earned from Indian bonds by global funds.
Additionally, the government is considering easing ownership limits on long-term sovereign bonds, a step aimed at deepening foreign participation in India's debt markets.
Stemming the Equity Exodus
The proposed measures come against the backdrop of a sustained equity selloff. Data from the National Securities Depository Limited (NSDL) reveals that FPI net sales in Indian equities have reached a staggering ₹2.25 lakh crore in 2026 alone. This relentless outflow has pressured the Indian rupee and added volatility to domestic markets.
Despite the exodus, domestic institutional investors have stepped in robustly to absorb the selling pressure. The Nifty 50 index has held relatively steady, trading around the 23,405 level. However, this represents a 5% decline from its July 2024 peak, underscoring the underlying stress.
Boosting Debt Appeal
By making Indian bonds more tax-attractive, the government hopes to achieve three objectives: first, to increase the appeal of debt as an asset class for global funds; second, to stabilize the rupee through steady debt-related inflows; and third, to partially offset the relentless equity outflows that have characterized 2026.
The timing is critical. With global interest rates remaining uncertain and emerging markets facing volatile capital movements, a predictable and favorable tax regime could give India an edge over competing destinations.
Skepticism Remains
However, not everyone is convinced. Market skeptics argue that while tax relief is welcome, global macroeconomic factors—such as US Federal Reserve policy, crude oil prices, and geopolitical tensions—play a far larger role in FIP decisions than domestic tax rates alone. Policy certainty, ease of repatriation, and currency stability, they note, matter more than marginal tax savings. The Cabinet's final decision is awaited. If approved, the move could mark a significant shift in India's approach to foreign debt investment.
