FPIs Pump Nearly ₹8,800 Crore into FAR Government Securities Following Landmark Tax Exemption
Foreign Portfolio Investors (FPIs) stepped up their purchases of Indian sovereign debt, investing ₹8,794.74 crore into government securities (G-Secs) under the Fully Accessible Route (FAR) over a swift turnaround. The aggressive buying spree came on the heels of decisive policy shifts by the Central Government and the Reserve Bank of India (RBI), which significantly dismantled long-standing tax and regulatory hurdles for offshore funds.
According to data compiled by the Clearing Corporation of India Ltd (CCIL), aggregate FPI holdings in FAR securities climbed to ₹3.32 lakh crore, up from ₹3.23 lakh crore recorded on June 3. The sustained capital infusion helped domestic bond yields ease and offered timely support to the Indian rupee amidst global currency volatility.
Policy Catalyst: Retrospective Tax Relief
The primary driver behind the sudden surge in offshore debt buying was an ordinance promulgated by the Union Government on June 5, which amended the Income Tax Act. The amendment exempted foreign portfolio investors from income tax on both interest income and capital gains generated from the sale, exchange, or transfer of eligible government securities.
Importantly, the tax relief was implemented with retrospective effect from April 1, 2025. Prior to this intervention, overseas debt investors contended with a steep tax regime:
- A 20% withholding tax levied on interest earned from government securities.
- A 12.5% long-term capital gains tax on listed bonds held for more than 12 months.
By removing these tax deductions, the government effectively enhanced net post-tax yields for global funds, triggering rapid rebalancing into Indian sovereign paper.
RBI Widens the FAR Universe
Complementing the Centre's fiscal move, the Reserve Bank of India widened the scope of the FAR framework during its monetary policy review. The central bank brought all fresh issuances of long-tenor dated securities—specifically 15-year, 30-year, and 40-year maturities—under the FAR fold.
Additionally, the RBI relaxed operational restrictions by removing limits concerning short-term investments, portfolio concentration, and individual security exposures for FPI investments under the general route. First introduced in 2020, the FAR framework allows non-resident investors to purchase specified Government of India dated securities without any quantitative ceiling.
Market Impact and Global Index Prospects
The synchronized regulatory measures have bolstered institutional sentiment in the domestic fixed-income market. Analysts noted that the influx of foreign capital absorbed supply pressures from the government’s scheduled borrowing programme, bringing downward momentum to sovereign yields.
"We can see the optimism from FPIs who nearly invested 75 per cent of the net purchase in G-secs under FAR category recorded during April & May," said Mataprasad Pandey, Vice-President at Arete Capital. "It also strengthens India's case for inclusion in major global bond indices, such as Bloomberg's sovereign bond index, whose inclusion decision was deferred earlier this year."
For Indian retail and corporate participants, softening sovereign yields lower benchmark borrowing costs across commercial paper, bank lending rates, and corporate debt markets, while foreign inflows provide much-needed stability to the capital account.
