While everyone is focused on FIIs selling Indian equities, something remarkable is happening in India’s bond market that almost nobody is talking about. Foreign investors poured a record ₹39,640 crore (approximately $4.7 billion) into Indian government bonds in June 2026 alone — the strongest monthly inflow ever recorded in this segment. The 10-year government bond yield fell to 6.7%, its lowest in 13 weeks.
What Changed? The Tax Exemption Ordinance of June 5
On June 5, 2026, the government promulgated an ordinance exempting eligible foreign investors from both capital gains tax and withholding tax on interest income from Indian government securities — effective retrospectively from April 1, 2026.
Before this change, foreign funds buying Indian G-Secs paid 20% tax on interest income. On a 6.8–7% yield bond, that reduced the effective return to roughly 5.4–5.6% — which is barely above what US money market funds pay with zero emerging market risk. The ordinance removes this discount entirely. Now foreign funds earn the full 6.8–7% yield on Indian bonds, with no tax drag.
The Bloomberg Global Aggregate Index — The Real Prize
The real reason behind the urgency of this tax reform is Bloomberg. India was included in the JPMorgan Government Bond Index-Emerging Markets in June 2024, which brought in estimated $24–30 billion over 12 months. But the bigger prize is the Bloomberg Global Aggregate Index — tracked by an estimated $2.5–3 trillion in global funds (versus ~$236 billion linked to the JPMorgan index).
Bloomberg deferred India’s inclusion in January 2026, citing tax and operational concerns. The June 5 ordinance directly addresses the tax concern. If Bloomberg includes India — a decision expected in Q3 2026 — even a 1–2% allocation from $2.5 trillion means $25–50 billion of additional foreign inflows into Indian bonds. That is transformational for the rupee and domestic interest rates.
What This Means for Interest Rates in India
More foreign demand for Indian bonds pushes bond prices up and yields down. Lower yields mean cheaper borrowing costs for Indian companies and households. If the Bloomberg inclusion happens and yields fall another 30–50 basis points from current levels (6.7% → 6.2–6.4%), that is equivalent to an additional 2–3 RBI rate cuts in terms of impact on the economy.
For home loan borrowers: MCLR-linked loans would eventually benefit. For businesses: lower corporate bond yields mean cheaper capital for expansion.
Impact on Your Money
Long-duration gilt funds: These are the biggest beneficiaries. When bond yields fall, bond prices rise. A 50 bps fall in the 10-year yield produces roughly 4–5% capital appreciation in a long-duration gilt fund. If you have a 12–18 month horizon and believe in Bloomberg inclusion, long-duration gilt funds look attractive at current yields.
Rupee: FII bond inflows strengthen the rupee. The rupee has been under pressure (₹84.20 as of June 26), but sustained bond inflows could push it back toward ₹82–83 over 6–12 months.
Short-term debt funds: Less direct benefit, but a falling interest rate environment is generally positive for all debt fund categories.
The Contrast With Equity FII Flows
The same foreign investors who are selling Indian equities are buying Indian bonds. This makes fundamental sense: equity investors are chasing AI returns in the US, while bond investors see India’s 6.8–7% yield (now tax-free) as one of the best risk-adjusted returns in emerging markets. India’s GDP growth at 7.7%, stable inflation at 3.4%, and a government fiscal deficit declining toward 4.4% of GDP make it a compelling sovereign credit story.
The equity outflow story dominates headlines. The bond inflow story is the untold bullish case for India.
Disclaimer: This article is for informational and educational purposes only. Debt mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.
