India Scraps Bond Taxes to Stabilize Rupee and Attract Capital

The Government of India and the Reserve Bank of India (RBI) launched a comprehensive financial package on June 5, 2026, to stabilize the rupee after it hit a record low of 96.9650 against the US dollar. The measures respond to massive foreign portfolio investor outflows, totaling approximately Rs 2.67 lakh crore in 2026, driven by geopolitical tensions from the West Asia war and a global capital shift toward AI technology.

Central to the plan is the Income-tax (Amendment) Ordinance 2026, which retrospectively exempts foreign institutional investors and the Bank for International Settlements from capital gains and withholding taxes on government securities, effective April 1. Simultaneously, the RBI expanded the Fully Accessible Route to include 15-, 30-, and 40-year sovereign bonds and green bonds. To further boost liquidity, the RBI raised equity investment limits for Non-Resident Indians and Overseas Citizens of India to 10% of paid-up capital and introduced concessional forex swaps for public sector undertakings through September 30, 2026.

RBI Governor Sanjay Malhotra maintained the benchmark repo rate at 5.25% while lowering the FY27 GDP growth forecast to 6.6%. Following these announcements, the rupee rebounded to approximately 94.94 per dollar. Financial analysts estimate these moves could attract between $30 billion and $80 billion in inflows, potentially accelerating India's inclusion in the Bloomberg Global Aggregate Index. Additional reforms are underway, including the introduction of derivatives on corporate bond indices to deepen the domestic debt market.