Government and RBI Consider Bond Tax Cut to Attract Foreign Investment

India Weighs Options to Attract Foreign Capital Amid Global Volatility

The Indian government and the Reserve Bank of India (RBI) are considering a range of measures to boost foreign capital inflows, as policymakers seek to protect the country's foreign exchange reserves and strengthen its external account amidst ongoing global market volatility.

According to sources familiar with the discussions, the Centre is exploring a possible cut in the withholding tax on government bonds, which could make Indian debt instruments more attractive to foreign investors. At present, foreign investors pay around 20 per cent withholding tax on interest income from government securities after the concessional 5 per cent rate expired in 2023.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

Policymakers believe a lower tax regime could encourage foreign investors to put their money into Indian government bonds, despite global capital remaining cautious. The discussions have gathered pace over the past few weeks as policymakers look for ways to conserve foreign exchange amid rising geopolitical risks.

The move is part of a broader effort to address the impact of the ongoing West Asia conflict on global markets. In a recent address, Prime Minister Narendra Modi urged citizens to reduce non-essential imports and save foreign exchange by limiting gold purchases, cutting fuel consumption, using public transport, and avoiding unnecessary overseas travel.

However, not all policymakers are convinced that the proposed tax relief will deliver the desired inflows. Senior officials have also examined whether India should revive a special foreign currency deposit scheme similar to the one introduced during the 2013 rupee crisis, which helped banks mobilise nearly $26 billion and significantly boosted India's forex reserves.