Tax Relief And RBI Measures Aim To Strengthen India’s External Position
The Reserve Bank of India (RBI) and the central government have unveiled a coordinated package of measures aimed at attracting foreign capital and strengthening India’s external finances amid rising geopolitical uncertainty and pressure on the rupee.
Economists estimate the combined initiatives could attract between $40 billion and $50 billion in foreign inflows, potentially covering a large portion of India’s projected balance of payments (BoP) gap for FY27.
The announcement comes against the backdrop of the ongoing West Asia conflict, which has pushed global crude oil prices higher and raised concerns about India’s current account deficit and external stability.
RBI Governor Sanjay Malhotra said the measures are designed to strengthen the country’s balance of payments while ensuring adequate foreign capital inflows to support economic growth.
Government Removes Tax Burden On Foreign Investors
A key component of the package is the government’s decision to exempt foreign portfolio investors (FPIs) from income tax on interest income and capital gains earned from investments in government securities.
The exemption has been granted retrospectively from April 1, 2026, making Indian government bonds significantly more attractive for overseas investors.
Previously, foreign investors faced a 20% tax on securities income, while short-term capital gains were taxed at 30% and long-term gains at 12.5%.
Market participants believe the move could deepen participation in India’s sovereign debt market and encourage long-term foreign investment.
The tax relief is expected to become particularly important as India seeks to diversify capital inflow sources amid global economic uncertainty.
RBI Introduces New Measures To Boost Foreign Capital
Alongside the government’s tax incentives, the RBI announced several measures designed to encourage capital inflows through multiple channels.
The central bank introduced a concessional foreign exchange swap facility aimed at promoting external commercial borrowings (ECBs) by public sector undertakings (PSUs).
It also unveiled a scheme to attract foreign currency retail term deposits with maturities ranging from three to five years through Indian banks.
In addition, the RBI expanded the Fully Accessible Route (FAR) framework by including all newly issued 15-year, 30-year, and 40-year government securities.
The regulator also removed limits on short-term investments, concentration limits, and individual security exposure for foreign portfolio investors investing through the general route.
According to Malhotra, these measures, combined with the government’s tax reforms, are expected to make Indian government debt more attractive to global investors.
Why Is India Focusing On Foreign Capital Inflows?
The policy package comes at a time when India’s external position has come under pressure due to rising crude oil prices following disruptions in the Strait of Hormuz, one of the world’s most critical energy shipping routes.
Higher oil prices directly affect India’s import bill, widening the current account deficit and increasing demand for foreign exchange.
Economists estimate that if crude oil averages around $90 per barrel and the current account deficit reaches approximately 2.1% of GDP, India could face a balance of payments gap of $40 billion to $50 billion during FY27.
According to Sakshi Gupta, Principal Economist at HDFC Bank, the latest measures could largely bridge that gap.
Several economists also noted that the package resembles measures introduced during the 2013 currency crisis, when India attracted substantial foreign currency deposits and external borrowings to stabilize its external position.
What Could This Mean For Interest Rates And The Rupee?
Analysts believe the measures could provide additional support to the rupee while giving the RBI greater flexibility in managing domestic monetary policy.
By attracting foreign capital through multiple channels, the central bank may reduce pressure to align domestic interest rate decisions with global monetary tightening cycles.
Economists argue that a stronger capital inflow environment lowers the risk of aggressive rate hikes aimed solely at defending the currency.
The measures could also improve investor confidence in India’s external stability at a time when global markets remain volatile due to geopolitical tensions.
With foreign investors already showing renewed interest in India’s debt market, policymakers hope the latest reforms will strengthen capital flows, support government borrowing programs, and help safeguard the economy against external shocks.
