Foreign investors have shown a marked preference for Indian government bonds, purchasing $7.7 billion in debt this year, surpassing last year's total.
This shift follows India's decision to eliminate taxes on overseas bond investors, paving the way for potential inclusion in the Bloomberg Global Aggregate Bond Index by early 2027, which could attract $25 to $27 billion in inflows by financial year 2028.
In contrast, foreign investors have sold $27.6 billion in Indian equities this year, as the stock market has lost appeal amid a global AI-driven momentum. The recent tax reforms, including the removal of the 12.5% long-term capital gains tax and the 20% withholding tax on interest income for foreign investors, have been described as a 'gamechanger' by industry experts.
Additionally, the inclusion of longer-tenor government securities under the 'fully accessible route' is expected to attract interest from foreign institutional investors. The bond inflows are anticipated to help narrow India's balance of payments deficit, which widened significantly due to capital outflows and rising energy prices.
The groundwork for the internationalization of India's bond market is also being laid, with Bloomberg launching an electronic trading workflow for Indian government bonds, enhancing liquidity access for foreign investors