India is making strategic moves to reapply for inclusion in major global bond indices by offering significant tax exemptions to foreign investors. The Reserve Bank of India (RBI) and finance ministry officials are engaging with global index operators and the Bank for International Settlements (BIS) to attract foreign investment into Indian government bonds.
The latest tax exemptions on capital gains and withholding taxes are expected to bring $7-11 billion into India. Officials have been in regular engagement with global bond index operators, addressing major concerns such as tax benefits, market access, and settlement. Clarity on trade settlement oversight is likely to increase the chances of India's inclusion in the Bloomberg Global gauge, which could draw immediate investments of about $5 billion into specified bonds.
Parul Mittal Sinha, head of markets (India and South Asia) at Standard Chartered Bank, stated that the tax exemptions make investing in Indian government bonds compelling for foreign investors. She expects incremental inflows of approximately $5 billion from foreign portfolio investors (FPIs) in response to these announcements.
“We expect these tax exemptions to make investing in Indian government bonds compelling for many foreign investors, and also significantly strengthen the case for inclusion in the Bloomberg Global Aggregate Index, especially if these bonds are made eligible for Euroclear settlement.”
Parul Mittal Sinha, head of markets (India and South Asia), Standard Chartered Bank
India has been part of the JP Morgan Global Bond Index-Emerging Markets since June 2024, Bloomberg’s EM Local Currency Government Index from January 2025, and the FTSE Russell Emerging Market Index since last September. However, Bloomberg’s Global Aggregate Bond Index deferred its India inclusion in January due to infrastructure bottlenecks and complex fund registration processes.
The government's recent announcements, including the scrapping of a 12.5% long-term capital gains tax and a 20% withholding tax on interest earned on government securities, have brightened prospects for inclusion in major global indices. The addition of long-dated securities and sovereign green bonds to the list of specified securities under the fully accessible route for FPIs is also a significant step.
Background
India's efforts to be included in major global bond indices have been ongoing, with previous attempts hindered by infrastructure and market access issues. Inclusion in these indices would lead to significant foreign investments, lower borrowing costs, and a deeper bond market.
Higher inflows from global funds could potentially lower the government’s borrowing cost and deepen the bond market. These developments are expected to help reverse the rupee's decline and strengthen India's financial market position.
