India's Bond Blitz: $2.2B in Two Weeks

India's Bond Blitz: $2.2B in Two Weeks Signals FPI Reversal

June 5 tax cuts triggered strongest foreign buying in 15 months—but equity sales persist, complicating the rupee defense.

On June 5, India removed all capital gains and withholding taxes on foreign portfolio investor purchases of government bonds. Within two weeks, the result was unmistakable: $2.2 billion flowed into FAR (Fully Accessible Route) bonds in June alone—nearly matching the previous eight months combined.

This isn't a modest policy tweak. Foreign investors poured ₹35,000 crore ($4.2 billion) into Indian bonds in June so far, a sixfold jump from May. The tax ordinance—retroactive to April 1—eliminated a combined burden that had run as high as 52.5 percent on interest and gains. Simultaneously, the RBI expanded the menu of eligible securities to include all new 15-year, 30-year, and 40-year government debt.

The motive is transparent: India is racing to defend its currency before Bloomberg's mid-2026 decision on whether to include Indian government bonds in its Global Aggregate Bond Index. Analysts estimate that index inclusion could trigger $20–30 billion in passive inflows over ten months. The June offensive serves both immediate and strategic purposes—shore up the rupee, which had weakened 5.4 percent from January to May, and create momentum for the Bloomberg call.

The measure is working tactically. Benchmark 10-year yields have fallen 22 basis points since June 4, to 6.77 percent, aided by RBI Governor Sanjay Malhotra's public pushback against rate-hike expectations. FPI holdings in FAR securities jumped from ₹3.23 lakh crore on June 3 to ₹3.58 lakh crore by mid-month—and buying occurred on all but one day during this window.

But the broader FPI picture remains fractured. While bonds soak up foreign capital, equities are hemorrhaging it. Share selling hit $5.55 billion in June, up from $3.45 billion in May. The arithmetic is brutal: net FPI outflows across all categories reached $562 million for the month, offsetting the bond gains. The rupee has edged back only marginally—to 94.40 per dollar by late June from 94.94 on June 5—a net gain of 0.6 percent despite the injection.

Why This Matters

The June 5 package reveals a government in repair mode on external accounts. The tax cuts target precisely the foreign capital that had abandoned India when emerging-market volatility spiked and US rates stayed elevated. By zeroing the tax wedge, India leapfrogged competing sovereign issuers (Indonesia, Mexico, Brazil) on after-tax returns. Economists note that FPI headroom under FAR's general category remains vast; foreign holdings are well below prescribed ceilings.

But the policy also exposes a deeper vulnerability: India can attract capital flows only when it actively bribes them with tax relief. Equity outflows suggest foreign investors retain doubts about the domestic growth story and valuations—truths tax cuts on bonds cannot address. DBS Bank's Radhika Rao noted foreign buyers have "turned constructive" on rupee debt, partly on Bloomberg index hopes, but that sentiment pivots on an external call, not fundamentals.

What to Watch

Bloomberg's mid-2026 decision is the load-bearing event. Index inclusion would lock in passive inflows and permanently lower the government's cost of borrowing. Exclusion would trigger immediate reversal. Watch for any commentary from Bloomberg in July or August signaling the decision's direction.

Monitor equity outflows: if they accelerate beyond current $5–6 billion monthly levels, the bond inflows will be tactical noise masking capital flight. And track rupee stability below 95 per dollar—the true test of whether June's measures absorbed or merely delayed external pressure.