The Indian rupee rebounded sharply in Friday’s trading session on June 5, poised to snap its three-day losing run, as the government announced a tax cut on bond investments by foreign institutional investors (FIIs) to attract overseas capital and stabilise the domestic unit.
The rupee is languishing near record low levels due to higher energy prices and equity market outflows amid the Middle East conflict.
Following the government’s announcement, the rupee jumped to the day’s high of 95.245 against the US dollar from its previous close of 95.74, recording a gain of 50 paise.
The domestic unit has been one of the worst-performing currencies this year, shedding 6.07% on a year-to-date basis, hurt by rising crude oil prices, which threaten to expand India’s import bill and impact its CAD and BOP, and record selling by foreign investors.
Govt scraps capital gains tax on bonds for FIIs
The government has removed capital gains tax on investments in government securities made by FIIs and the Bank for International Settlements (BIS), according to an ordinance issued on June 5. The tax exemption, effective from April 1, also covers interest income earned on these securities, subject to certain reporting requirements.
Earlier, foreign investors were required to pay a 12.5% long-term capital gains tax on listed bonds and shares held for more than a year, along with a 20% withholding tax on interest earned from government bonds.
RBI unveils measures to attract foreign capital
Separately, the Reserve Bank of India (RBI) announced a series of steps aimed at boosting foreign investment and strengthening India’s external financing position amid global uncertainty and elevated oil prices.
The RBI expanded the list of government securities eligible under the Fully Accessible Route (FAR) by including all new issuances of 15-year, 30-year and 40-year government bonds.
It also relaxed investment restrictions for FPIs under the General Route by removing limits on short-term investments, concentration caps and individual security limits.
The combined impact of the RBI’s measures and the government’s tax exemptions is expected to make Indian government bonds more attractive to foreign investors, helping increase overseas participation in the debt market and potentially lowering the government’s borrowing costs.
Dhawal Dalal, President and CIO – Fixed Income, Edelweiss MF, said that both GOI and RBI have announced several measures to augment much-needed capital inflows. “This should have a net positive impact on India’s FX reserves and investor sentiment in the medium-term. That said, with average CPI expectations being raised, bond market investors will have to brace for a gradual increase in policy rates down the road, in our view,” he said.
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