India last month abolished taxes on overseas investors purchasing government bonds, clearing the path for a potential inclusion in the Bloomberg Global Aggregate Bond Index. While an official update on the inclusion is expected soon, the actual entry into the index is anticipated in early 2027.
According to Ashish Vaidya, Head of Treasury at DBS Bank, India could receive a weightage of approximately 0.7% in the Bloomberg Global Aggregate Bond Index. Speaking on CNBC’s “Inside India” last week, Vaidya estimated that the inclusion could generate foreign inflows of approximately $25 billion to $27 billion by the financial year 2028.
Foreign investor interest in Indian debt has already accelerated. Data from the National Securities Depository Limited (NSDL) shows overseas investors have purchased .7 billion worth of Indian debt so far in 2026, exceeding the total inflows of .6 billion recorded throughout 2025.
A significant portion of these investments arrived immediately after India announced tax reforms. Of the total debt inflows this year, .8 billion entered the market in June alone after the government abolished the 12.5% long-term capital gains tax and the 20% withholding tax on interest income for foreign investors purchasing government bonds.
In contrast, foreign investors have sold direct equity holdings worth .6 billion during 2026 as Indian equities lost momentum amid the artificial intelligence-driven rally in global markets.
India has also expanded the Fully Accessible Route (FAR) by including government securities with maturities of 15, 30, and 40 years, allowing overseas investors to purchase these bonds without investment caps. Under the Fully Accessible Route, foreign investors invested $2.3 billion during June, marking the highest monthly inflow recorded in the past 14 months.
HSBC stated in a note last month that expanding the Fully Accessible Route bond universe to include longer-duration government securities could attract foreign insurance companies and pension funds with demand for long-term investments.
Tanveer Sethi, Senior Executive Vice President of Investment Management at Kotak Mahindra Asset Management Singapore, described the tax exemption for foreign investors purchasing Indian government bonds as “truly a gamechanger.” He said the expected Bloomberg index inclusion is the natural and intended consequence of the tax reform. According to Sethi, current inflows are largely driven by tactical investors and active investors positioning themselves ahead of the anticipated inclusion.
Experts also expect ownership of these investments to gradually shift after the inclusion, with passive investment funds replacing many of the tactical investors currently building positions in the market.
The increasing bond inflows are expected to provide support for the Indian rupee, which has faced pressure from persistent equity outflows and a rising import bill caused by higher global oil prices.
India’s balance of payments deficit widened sharply to $23.6 billion during the financial year ending in March 2026, compared with $5 billion in the previous year. During April and May alone, the deficit reached $11 billion because of continued capital outflows and higher energy prices. Economists believe sustained foreign investment into government bonds could help reduce the deficit while strengthening the domestic currency.
Gaura Sengupta, Chief Economist at IDFC First Bank, noted that India’s earlier inclusion in the JPMorgan Government Bond Index-Emerging Markets in 2024 generated net foreign inflows of up to $20 billion. She pointed out that the Bloomberg Global Aggregate Bond Index includes both developed and emerging markets, meaning Indian government bonds will have to compete with a much broader investment universe. Sengupta added that abolishing taxes for overseas bond investors has lowered compliance costs and improved the ease of doing business for international investors.
Bloomberg has already begun strengthening market infrastructure ahead of any possible inclusion. Last week, the company introduced an electronic trading workflow for Indian government bonds that enables foreign portfolio investors to access liquidity provided by both international and domestic banks through the Bloomberg Terminal.
The government’s tax reforms, expansion of the Fully Accessible Route, and improvements in trading infrastructure collectively mark a significant step in opening India’s government bond market to global investors. With expectations rising over Bloomberg Global Aggregate Bond Index inclusion in early 2027, foreign debt inflows are expected to play an increasingly important role in supporting India’s capital markets, external finances, and currency stability.
About The Author
Comment List