RBI and Government Roll Out Policy Boost to Attract Up to $50 Billion Foreign Capital

India has unveiled a coordinated policy push to draw global investments, aiming to strengthen its external position and stabilize the economy amid global uncertainties.

RBI and Government Launch Strategic Measures to Boost Foreign Capital Inflows

Coordinated Policy Push to Strengthen External Position

In a significant move to reinforce India’s financial stability, the Reserve Bank of India (RBI) and the central government have introduced a series of policy measures aimed at attracting foreign capital. These initiatives come at a time when global uncertainties, particularly geopolitical tensions in West Asia, are putting pressure on emerging market economies.

Economists estimate that the combined impact of these measures could result in foreign inflows of up to $50 billion. This amount could play a crucial role in bridging India’s projected balance of payments (BoP) gap for the financial year 2026-27 (FY27).

Tax Exemptions for Foreign Investors in Government Securities

One of the most significant announcements by the government is the exemption granted to foreign portfolio investors (FPIs) on income tax related to interest income and capital gains from investments in government securities (G-secs). This exemption has been applied retrospectively from April 1 of the current financial year.

Previously, foreign institutional investors (FIIs), including FPIs registered with the Securities and Exchange Board of India (Sebi), were subject to relatively high tax rates. Interest income from securities was taxed at 20 per cent, while short-term capital gains attracted a 30 per cent tax and long-term gains were taxed at 12.5 per cent under the Income-tax Act, 2025.

By removing these tax burdens, the government aims to make Indian sovereign bonds more attractive to global investors, thereby deepening the domestic bond market.

RBI Introduces Forex Swap Facility and Deposit Schemes

Complementing the government’s efforts, the RBI has introduced a concessional foreign exchange swap facility. This facility is designed to encourage public sector undertakings (PSUs) to raise funds through external commercial borrowings (ECBs).

Additionally, the central bank has launched a scheme to attract foreign currency retail term deposits with maturities ranging from three to five years. These deposits are expected to bring in stable foreign currency inflows through the banking system.

RBI Governor Sanjay Malhotra stated that these initiatives are aimed at strengthening India’s balance of payments while maintaining flexibility in monetary policy decisions.

Expansion of Fully Accessible Route (FAR) Securities

The RBI has also expanded the scope of the Fully Accessible Route (FAR) for foreign investors. Under this framework, all new issuances of long-term government bonds—specifically 15-year, 30-year, and 40-year securities—will now be open to foreign participation without restrictions.

In addition, the central bank has removed limits on short-term investments, concentration, and individual security exposure for FPIs investing through the general route. These changes are expected to significantly improve liquidity and participation in India’s bond market.

Addressing Currency Pressures and Global Challenges

The policy measures come at a critical time when the Indian rupee has been under pressure due to rising global crude oil prices. The escalation of tensions in West Asia, particularly disruptions linked to the Strait of Hormuz, has led to increased energy costs for import-dependent economies like India.

Higher crude prices have adversely impacted India’s external balance, making it essential to attract foreign capital to offset the increased import bill. The newly announced measures are therefore aimed at stabilizing the currency and improving overall macroeconomic resilience.

Economists Estimate Strong Inflow Potential

Leading economists have expressed optimism about the potential impact of these measures. Sakshi Gupta, Principal Economist at HDFC Bank, estimates that the initiatives could help bridge a $40 billion to $50 billion BoP gap in FY27. This estimate is based on assumptions of a current account deficit of 2.1 per cent of GDP and average crude oil prices of $90 per barrel.

Similarly, Indranil Pan, Chief Economist at YES Bank, believes that inflows in the range of $35 billion to $45 billion are achievable, which would be sufficient to address most of the anticipated external financing gap.

These projections highlight the significance of the coordinated policy approach in addressing macroeconomic challenges.

Lessons from Past Policy Measures

India has previously implemented similar measures during periods of financial stress. In 2013-14, initiatives such as external commercial borrowings and foreign currency non-resident (FCNR(B)) deposits attracted substantial inflows. ECB inflows reached $12 billion, while FCNR(B) deposits amounted to $26.6 billion during that period.

However, the current strategy differs in its broader approach. Instead of relying heavily on a single channel, the government and RBI are targeting multiple avenues to attract foreign capital, thereby reducing risk and enhancing effectiveness.

Enhanced Incentives for Banks and Investors

The RBI has introduced additional incentives to make its schemes more attractive. It has agreed to absorb the full hedging cost for banks raising FCNR(B) deposits, significantly reducing the financial burden on banks.

Furthermore, these deposits have been exempted from cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements, making them more appealing for financial institutions. These incentives are expected to encourage greater participation from both banks and investors.

Greater Flexibility in Monetary Policy

Analysts believe that these capital inflow measures will also provide the RBI with greater flexibility in managing domestic interest rates. By securing external funding, the central bank can reduce its dependence on aligning interest rate decisions with global monetary trends.

This allows policymakers to focus more on domestic economic conditions, potentially avoiding sharp rate hikes that could impact growth. Economists suggest that this added flexibility is a key benefit of the current policy framework.

Recent Trends in Foreign Investment Flows

Recent data indicates mixed trends in foreign investment. According to National Securities Depository Limited (NSDL), foreign portfolio investors have been net buyers of debt worth ₹377 crore in early June 2026.

However, they have simultaneously withdrawn ₹20,977 crore from equity markets during the same period. This divergence highlights the importance of targeted policy measures to attract stable and long-term capital inflows.

Conclusion: Strengthening India’s Economic Resilience

The combined efforts of the RBI and the government represent a proactive approach to managing external economic challenges. By introducing tax incentives, expanding investment avenues, and offering financial support mechanisms, policymakers are working to ensure a steady flow of foreign capital into the country.

If successful, these measures could not only bridge the anticipated BoP gap but also strengthen India’s position as an attractive destination for global investors. As the global economic landscape continues to evolve, such strategic interventions will play a crucial role in maintaining financial stability and supporting long-term growth.