To position India as a premier investment destination, the Ministry of Finance has executed major capital market reforms designed to deepen the Government Securities (G-Sec) market and accelerate Foreign Portfolio Investment (FPI) into equities.
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Key Measures Taken by the Government
The government has split these structural reforms across three independent financial pillars:
- Liberalisation of Individual Foreign Equity Inflows:
- Opening the Portfolio Investment Scheme (PIS): Individual Persons Resident Outside India (PROIs) are now permitted to directly invest in listed Indian equities through the PIS framework. Previously, this streamlined path was strictly reserved for NRIs and OCIs.
- Doubling Equity Ceilings: The single-company investment cap for an individual foreign national has been doubled from 5% to 10%.
- Expanding Aggregate Caps: The total combined holding for all individual PROIs within a single listed corporate firm has been expanded from 10% to 24%.
- Digital Pipeline Reuse: Onboarding processes use the pre-existing, highly efficient NRI/OCI digital onboarding infrastructure to ensure fast setup without new verification delays.
- Overhauling the G-Sec Debt Market Framework:
- Expanding the Fully Accessible Route (FAR): The ceiling-free FAR channel has been expanded to include new ultra-long-term 15, 30, and 40-year G-Sec issuances, alongside Sovereign Green Bonds (SGrBs) of similar tenors.
- Dismantling General Route Constraints: The government has permanently scrapped three operational restrictions for FPIs dealing in G-Secs under the General Route:
- The short-term investment limit.
- The concentration limit.
- The security-wise limit.
- Merging Category Buckets: The separate sub-buckets of ‘General’ and ‘Long-term’ investment limits have been unified into a single pool per security category, giving fund managers total portfolio flexibility.
- Retaining Macro-Caps: The overall quantitative safety ceilings are held steady at 6% of the outstanding stock of Central Government Securities and 2% for State Government Securities (SGSs).
- Complete Income Tax Waiver on Sovereign Debt:
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- Zero-Tax Regime: FPIs are completely exempt from income tax on any interest earned or capital gains generated through investments in Government Securities.
- Retroactive Target: The tax holiday is effective for all earnings made on or after April 1, 2026.
- Institutional Scope: The exact same tax immunity is explicitly extended to the Bank for International Settlements (BIS) to lock in secure, institutional international liquid reserves.
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- Foreign Portfolio Investment (FPI): This involves investors holding financial assets, such as stocks and bonds, in another country.
- FPI does not provide direct ownership or control of a company’s underlying physical assets and remains highly liquid and mobile. By law, investment by a single FPI (or aligned investor group) in any Indian company cannot exceed 10% of its total paid-up equity capital.
- Government Securities (G-Sec): A tradeable debt instrument issued by either the Central Government or State Governments that acknowledges the government’s financial debt obligation. (UPSC CSE 2018)
- They represent the baseline risk-free rate in the economy and serve as the foundation for the broader financial system’s yield curve.
- Fully Accessible Route (FAR): A specialized regulatory channel introduced by the RBI that allows non-resident investors to buy specific, designated government bonds without any quantitative restrictions or upper investment caps.
- Sovereign Green Bonds (SGrBs): Interest-bearing debt securities issued by the government where the financial proceeds are legally locked to fund public projects that reduce the carbon intensity of the economy.
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Significance of the Measures taken
- Attracting Patient Capital: By expanding the FAR route to 30- and 40-year bonds and eliminating short-term restrictions, India is directly targeting massive global long-term buyers like pension funds, insurance companies, and sovereign wealth funds.
- Establishing a Smooth Yield Curve: Welcoming stable foreign money into ultra-long tenors helps the state develop a smooth, predictable interest rate benchmark across all timelines, reducing structural borrowing costs.
- Achieving Global Parity: The zero-tax regime eliminates structural cost disadvantages, placing Indian G-Sec yields on an equal footing with advanced Western and Asian sovereign debt markets that operate tax-free frameworks for foreign central funds.
- Buffering Foreign Exchange Reserves: A steady, systematic inflow of foreign cash into both stocks and bonds directly strengthens India’s foreign exchange reserves, shielding the local currency from sudden global volatility.
Challenges that need to be Tackled
- Vulnerability to Capital Flight: While removing concentration and short-term holding limits gives fund managers high flexibility, it increases the speed at which foreign capital can exit the domestic market during global financial shocks.
- Risk of Hot Money Volatility: Merging the ‘General’ and ‘Long-term’ investment buckets might cause a skew toward short-term, speculative trading if global macroeconomic conditions shift rapidly.
- Managing Exchange Rate Pressures: Large, unregulated inflows of foreign capital can cause a sudden appreciation of the Indian Rupee (INR), potentially hurting the global competitiveness of Indian exporters.
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Way Forward
- Strengthening Macro-Prudential Surveillance: The Reserve Bank of India (RBI) and SEBI must deploy real-time data monitoring tools to track the velocity of inflows under the unified investment limits, ensuring the 6% macro-cap is never breached dynamically.
- Deepening the Corporate Bond Market: The success of these G-Sec reforms should be used as a blueprint to systematically ease FPI constraints in high-grade corporate debt, ensuring balanced capital depth.
- Enhancing Hedging Frameworks: Expand domestic interest rate derivative markets to allow large foreign pension and insurance funds to easily hedge their long-term currency risks within Indian financial borders.
8 Jun 2026
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