Indian bond inflows surge to 15-month high after tax overhaul

Foreign portfolio investors funneled $2.2 billion into Indian government securities under the fully accessible route in June, through the 25th. That made June the strongest month for FAR inflows in 15 months and nearly six times the $460 million recorded in May, clearing corporation data show. The surge followed a June 5 policy package that eliminated a structural tax friction for long-duration foreign buyers.

The government exempted interest and capital gains tax on FPI investments in G-Secs made on or after April 1, 2026. It also expanded the FAR-eligible universe to include bonds with tenors up to 40 years, alongside Sovereign Green Bonds. The changes took effect after the April start date, meaning June was the first full month of eligibility.

The FAR route, introduced in 2020, allows non-resident investors to buy specified G-Secs without ceiling restrictions. The new measures deepen that access by removing a tax disincentive that long-term holders faced.

Local media reports, citing market talk, said one large foreign investor deployed about $1 billion into G-Secs of up to 10-year tenor during the month. The trade was not independently confirmed.

Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap, said the FAR route saw a sharp pickup after the policy changes. "These measures have materially improved the post-tax attractiveness of Indian government securities and have removed a key impediment for long-term foreign investors," he said. Future inflows will depend on India's ability to offer competitive risk-adjusted returns, he added.

K Arvind, head of treasury at Tamilnad Mercantile Bank, said the government further opened the market under FAR with easier access and the tax removal acting as key positives.

The June inflow was the highest since March 2025, when FPIs invested $3.34 billion in a single month. That spike was tied to India's inclusion in JPMorgan's emerging-market bond index, which triggered passive buying. The current inflow is driven by tax policy rather than index inclusion, making it an active discretionary flow.

Srinivasan said that with elevated US Treasury yields, investment decisions now factor in India's macro stability, policy consistency, market access and post-tax returns, not just yield arbitrage. That should support steady FAR inflows over the medium term, he said.