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Despite FPI purchases of GSecs being the cheapest form of foreign capital, ownership is <3% due to i) non-inclusion in benchmarks like Global Agg & FTSE WBGI; and ii) low hedged post-tax yields. Progress has been made on market infra and operational concerns, tax reforms before the mid-2026 review could speed up India’s inclusion, opening up US$45-50bn of inflows over two years and pave the way for participation from global pension and endowment investors. 20% tax on coupon interest is also well above most peer jurisdictions (some like China give special dispensation/exemption to index-inclusion-led flows), and limits participation, as relative returns are unattractive.
Foreign investments in GSecs are the cheapest form of foreign capital
India needs steady inflows of foreign capital. Its quality matters too: cost, stability, and other benefits (e.g., FDI comes with technology). Inflows from PE/VC funds, while productive, are also expensive: their exits at implied high IRRs pushed FDI repatriation to US$55bn last year, negating gross inbound FDI. FPIs buying GSecs, on the other hand, are the cheapest form of capital, but their ownership remains low at 3% despite attractive gross yields (no SIP-led valuation distortions). Two reasons i) Not yet part of benchmarks like Bloomberg Global Agg; FTSE WBGI; and ii) hedged post-tax yields in India are unattractive.
Inclusion in global bond indices delayed by taxation & process-related issues
Factors in favour of India’ inclusion: 1) India’s size: by 2030 it could be ~5% of global GDP; 2) Fiscal stability when nearly all developed markets (DMs: US, UK, JP) have fiscal stress; 3) Several DMs now show policy volatility and institutional failings earlier attributed to EMs; and 4) Low yields in China. However, decision deferral in Jan-2026 was due to “settlement & post-trade tax process delays, lack of automated workflows, and repatriation… for FPIs”. We understand progress has been made on these, like in repatriating proceeds faster, extension of settlement hours and entry of Exchange-Traded Products.
Tax reforms could unlock large bond inflows, support INR
Both Global Agg and FTSE WBGI (AUM ~USD 4.5tn) seek clarity or exemption on taxes (govt. considering reducing taxes on FPI debt investments). Inclusion could imply 45-50bn of inflows over two years, and greater allocation from pension funds/endowments not using these as benchmarks but taking comfort from inclusion and the clarity on taxation. Several major nations do not tax bond investments, and even those that do, like China, gave a special dispensation to investors that entered after index inclusion (tax exemption granted has so far been extended repeatedly). Further, coupon interest tax of 20%, higher than in most peer jurisdictions, reduces the relative attractiveness of Indian debt.
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