FAR Expansion, Tax Relief May Boost Foreign Bond Inflows, but Risks Remain

Why It Matters

Expanding the FAR and offering tax relief could diversify India’s investor base and reduce sovereign financing costs, but short‑term capital flows remain vulnerable to external geopolitical and commodity shocks.

Key Takeaways

• RBI adds 15‑, 30‑, 40‑year bonds to FAR
• New issues: 6.68% 2040, 7.24% 2055, 7.71% 2066
• Tax exemption aims to boost foreign portfolio inflows
• 10‑year yield slipped to 6.94% then closed 6.97%
• Geopolitical tensions may delay large‑scale foreign purchases

Pulse Analysis

India’s bond market has long been constrained by a narrow set of securities eligible for foreign portfolio investment. The Fully Accessible Route, introduced to simplify cross‑border purchases, previously capped eligible tenures at 10 years, limiting the depth of the investor pool. By extending the FAR to include 15‑, 30‑, and 40‑year government papers, the RBI is aligning India with global best practices where longer‑dated sovereign debt attracts pension funds and insurance companies seeking duration matching. This structural change broadens the yield curve, offering foreign investors more tools for risk‑adjusted returns.

The concurrent tax exemption on interest earnings removes a key cost barrier for foreign investors, effectively raising the net yield on Indian securities. In markets such as Brazil and South Africa, similar fiscal incentives have spurred measurable spikes in FPI inflows, especially into longer‑dated instruments. However, the timing of capital movement is highly sensitive to macro variables. Elevated crude oil prices strain emerging‑market trade balances, while the volatile security situation in West Asia fuels risk aversion. Treasury executives therefore anticipate a gradual, rather than immediate, uptick in foreign purchases, with deposit‑linked schemes likely leading the early wave.

If the policy gains traction, the immediate effect could be a modest compression of yields, as seen by the 7‑basis‑point dip in the 10‑year G‑sec rate. Over the medium term, a deeper, more diversified investor base may lower India’s cost of debt, supporting fiscal financing for infrastructure and social programs. Nonetheless, policymakers must monitor external shocks and ensure domestic market liquidity to prevent abrupt yield volatility. The success of the FAR expansion will ultimately hinge on the interplay between structural incentives and the broader geopolitical climate.