Forex measures yield results! FPIs buy record $4.2 billion Indian government bonds in June; reserves may get a boost

The government and RBI’s steps to attract capital inflows seems to be yielding results with foreign investors pouring in a record Rs 39,640 crore, or around $4.2 billion, in Indian government bonds in June so far.The sharp rise in inflows follows a series of measures by the government and the Reserve Bank of India, including exempting capital gains tax on eligible investments in government securities and widening the list of bonds available under the Fully Accessible Route (FAR). The steps were aimed at encouraging greater overseas participation in India's domestic bond market.The coordinated steps taken by the government and regulators—including permitting overseas investors to purchase government bonds with maturities of up to 30 years—are expected to support further growth in India's foreign exchange reserves, which stood at $672 billion as of June 12.Also Read | El Nino woes: Why weak monsoon may turn out to be a bigger worry for India than US-Iran warAccording to an ET report, this is the highest monthly inflow into sovereign debt by a wide margin. The figure comfortably exceeds the previous record of Rs 22,005 crore recorded in August 2024.Market participants said the tax relief has also strengthened expectations that Indian government bonds could find a place in Bloomberg's Global Aggregate Index."RBI's measures have alleviated concerns regarding rupee depreciation, while tax exemptions for FPIs have boosted optimism about India's potential inclusion in Bloomberg's global aggregate index," said Sameer Karyatt, Managing Director and Head of Trading at DBS Bank. "These factors have prompted some investors to invest proactively in India, a trend I expect to continue unless there are major shifts in the global geopolitical environment."The Indian rupee has also recovered after touching a record low of 96.96 against the US dollar in late May, ending Thursday's session at 94.40. Since the policy measures were announced, the benchmark 10-year government bond yield has declined by 20 basis points to 6.76%, according to CCIL data.Bond yields and prices move in opposite directions. One basis point equals one-hundredth of a percentage point."Because the rupee was so volatile and rapidly depreciating, debt investors were averse. But now there is greater confidence and investors think this is a good opportunity," said Abhishek Upadhyay, Senior Economist, Fixed Income Strategy, ICICI Securities PD. "I also expect further inflows at the end of this calendar year, as the Bloomberg index inclusion is expected," he added.The strong inflows recorded in June come after a relatively subdued FY26, during which net foreign portfolio investment into FAR bonds stood at Rs 3,546 crore, according to CCIL data.Despite the recent surge, some market participants have advised against assuming that June's pace of inflows will continue. They noted that although the latest policy initiatives have improved the attractiveness of Indian government securities, elevated US Treasury yields continue to limit their relative appeal.Also Read | Gold price crash explained: Why are gold rates falling and when will yellow metal recover?