MUMBAI: In a coordinated move, govt and RBI Friday rolled out a clutch of measures aimed at attracting foreign portfolio investors and non-resident funds to govt bonds and bank deposits. The strategy is as much about sentiment as it is about flows: signalling openness, easing friction, and offering a small subsidy from RBI in the form of free insurance cover to banks against rupee depreciation. As a result, the rupee gained by 84 paise to close at 94.95 compared with Thursday’s close of 95.79 – its biggest gain in two months.Bankers said the biggest kicker could come from retail deposits. If individuals are allowed to park even borrowed funds in India to arbitrage the interest rate gap, inflows could swell by $30-40 billion. The proposition is further sweetened by an implicit safety net, with the RBI offering to swap dollars for rupees and back in the future at no cost, blunting currency risk that would otherwise deter such trades. The bet, as always, is that a surge in dollar inflows will steady the rupee without creating future vulnerabilities.RBI also announced a concessional swap facility for external commercial borrowings raised by public sector undertakings, available until Sept 30, 2026, and a temporary window under which it would bear the full hedging cost for fresh three- to five-year foreign currency non-resident deposits mobilised by banks over the same period. In a decisive fiscal-legislative push to complement the monetary stance, the govt on Friday exempted foreign investors from income tax on both interest income and capital gains arising from investments in G-secs.Govt widens participation base in equity marketsFPIs have been exempted from income tax on interest income and capital gains arising from investments in G-secs.This was effected through an ordinance amending the Income Tax Act, with effect from April 1.The change marks a sharp departure from the prevailing regime, where FPIs were subject to a 12.5% long-term capital gains tax on listed securities held for over a year and a 20% withholding tax on interest income from govt bonds, thereby improving the relative attractiveness of gilts in global portfolios. Besides foreign portfolio investors, the ordinance also covers the Bank for International Settlements, headquartered in Basel.The moves aim at shoring up the rupee, which has been among the worst performers in Asia, with portfolio investors pulling out close to Rs 2.6 lakh crore so far this year.RBI also expanded the Fully Accessible Route, under which foreign investors can invest without restrictions, to include new issuances of 15-year, 30-year, and 40-year govt securities, as well as sovereign green bonds of eligible tenors. Further liberalisation was carried out under the general route for FPI investments, with the removal of short-term investment limits, concentration limits, and security-wise caps, while retaining the overall ceiling of 6% of outstanding central govt securities and 2% for state loans.In equity markets, govt widened the participation base by allowing individual persons resident outside India (PROIs) to invest directly in listed Indian companies through the portfolio investment scheme, a route previously restricted to NRIs and OCIs. The investment limit for such individuals has been raised to 10% per company, with the aggregate cap increased to 24%.
