Government and RBI Launch Major Measures to Attract Foreign Capital

In a significant policy initiative aimed at strengthening foreign investment sentiment, the Government of India and the Reserve Bank of India (RBI) have jointly introduced a series of measures designed to attract overseas capital into government securities and Indian banking channels. The move seeks not only to increase foreign fund inflows but also to reinforce confidence in India's financial markets amid evolving global economic conditions.

The package combines regulatory easing, fiscal incentives, and currency risk mitigation mechanisms to make Indian assets more attractive to foreign portfolio investors (FPIs) and non-resident depositors. Market participants view the measures as a strong signal of India's commitment to maintaining an investor-friendly environment while ensuring financial stability.

The immediate market reaction was positive. Following the announcement, the Indian rupee appreciated sharply by 84 paise, closing at 94.95 against the US dollar compared to the previous day's close of 95.79. This marked the currency's strongest single-day gain in nearly two months.

Potential for Significant Deposit Inflows

Banking industry experts believe one of the most impactful outcomes could come from increased foreign currency deposits. According to market estimates, if investors are permitted to deploy even leveraged funds in India to capitalize on interest rate differentials, the country could witness additional inflows of approximately USD 30-40 billion.

To further enhance the attractiveness of such investments, the RBI has introduced a mechanism that effectively reduces exchange-rate risk. Through a special swap arrangement, investors can convert dollars into rupees and later reverse the transaction without bearing additional currency-related costs. This facility is expected to encourage participation from overseas investors who might otherwise hesitate due to foreign exchange volatility.

RBI Introduces Special Swap Facilities

As part of the broader package, the central bank announced a concessional swap facility for external commercial borrowings (ECBs) raised by public sector undertakings (PSUs). This facility will remain available until September 30, 2026, providing borrowing entities with greater flexibility and lower currency-hedging expenses.

In addition, the RBI has opened a temporary window under which it will absorb the entire hedging cost for newly mobilized three- to five-year foreign currency non-resident (FCNR) deposits raised by banks during the same period. This measure is expected to encourage banks to attract long-term foreign currency deposits and strengthen foreign exchange reserves.

Government Announces Tax Relief for Foreign Investors

Complementing the RBI's monetary initiatives, the government has introduced a major fiscal incentive for foreign investors. Investments in Government Securities (G-Secs) will now enjoy an exemption from income tax on both interest earnings and capital gains.

The tax relief is expected to improve the attractiveness of Indian sovereign debt instruments and enhance India's competitiveness in the global fixed-income market. Analysts believe the combination of tax benefits, lower hedging costs, and currency support mechanisms could significantly increase foreign participation in India's debt market.

Strengthening Investor Confidence

Together, these measures represent a coordinated effort by policymakers to attract long-term overseas capital, support the rupee, deepen domestic financial markets, and improve liquidity conditions. While the success of the initiative will depend on global market dynamics and investor response, the policy package has already generated positive sentiment across financial markets.

Short Summary

The Government of India and RBI have launched a comprehensive package of measures to attract foreign investment into government bonds and bank deposits. Key initiatives include tax exemptions for foreign investors, concessional currency swap facilities, and RBI-backed hedging support, helping the rupee record its strongest gain in two months.