FII Bond Inflows Hit an All Time Record in June After India’s Capital Gains Tax Exemption

FII bond inflows into India touched an all time monthly record in June 2026, with foreign portfolio investors pouring approximately Rs 39,640 crore, or about 4.2 billion dollars, into government securities under the Fully Accessible Route. The figure smashed the previous record of Rs 22,005 crore set in August 2024 by a margin of around 80 percent.

The surge in FII bond inflows follows a coordinated policy push by the government and the Reserve Bank of India, anchored by an ordinance that exempted eligible foreign investors from capital gains tax and withholding tax on Indian government securities. The move is widely seen as clearing a key regulatory hurdle standing in the way of India’s inclusion in Bloomberg’s Global Aggregate Bond Index.

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What Triggered the Record FII Bond Inflows

The Income-tax (Amendment) Ordinance, 2026, promulgated on 5 June 2026, exempted specified foreign investors from long term capital gains tax and removed the 20 percent withholding tax previously charged on interest income from Indian government securities, with the changes taking effect from 1 April 2026. Before the ordinance, foreign investors faced a 12.5 percent long term capital gains tax on bonds held for more than 12 months and a 20 percent withholding tax on interest earned.

Alongside the tax changes, the RBI expanded the pool of securities available to foreign investors under the Fully Accessible Route, including access to 30 year government bonds for the first time, and removed limits related to short term investment, concentration and individual securities under the General Route. Together, these two steps removed two of the most persistent barriers that had kept overseas capital on the sidelines of India’s bond market.

Sameer Karyatt, MD and Head of Trading at DBS Bank India, said the RBI’s measures had alleviated concerns around rupee depreciation while the tax relief boosted optimism about India’s potential inclusion in Bloomberg’s global aggregate index, prompting some investors to invest proactively in India, a trend he expects to continue unless there are major shifts in the global geopolitical environment.

Impact of FII Bond Inflows on the Rupee and Bond Yields

The rupee, which had fallen to a record low of Rs 96.96 per dollar in late May 2026, staged a sharp recovery to Rs 94.40 by 26 June, tracking closely with the acceleration in FII bond inflows through the month. The 10 year benchmark G-Sec yield eased by around 20 basis points since the measures were announced, closing near 6.76 percent according to CCIL data.

Month (2026)	FAR Bond Inflows
April	Rs 5,262 crore
May	Rs 5,512 crore
June	Rs 39,640 crore (record)

FPI holdings under the Fully Accessible Route stood at around Rs 3.58 lakh crore as of 23 June, up from Rs 3.23 lakh crore at the start of the month, reflecting how sharply the pace of buying accelerated once the ordinance took effect. Total FPI ownership of Indian government securities across all routes remains relatively small in absolute terms, at roughly Rs 3.75 trillion or about 3.34 percent of the overall market as of mid May.

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Why Bloomberg Index Inclusion Matters for FII Bond Inflows

India’s 2024 inclusion in the JPMorgan Government Bond Index for Emerging Markets is tracked by an estimated 236 billion dollars in global funds, but the much larger prize is the Bloomberg Global Aggregate Index, tracked by an estimated 2.5 to 3 trillion dollars worldwide. India’s Bloomberg inclusion was postponed in January 2026 partly due to tax and operational issues that the June ordinance now directly addresses.

If Bloomberg proceeds with India’s inclusion, even a modest allocation from that much larger index tracking pool could translate into a far bigger and more structural wave of FII bond inflows than the tactical buying seen so far, since index linked funds would be required to hold Indian government bonds in proportion to their weight in the benchmark rather than making an active choice to invest.

Risks That Could Slow FII Bond Inflows

Not every analyst is convinced this marks a permanent turning point. Elevated US Treasury yields continue to compete directly with Indian government bonds for global fixed income capital, and when risk free dollar yields are high, the relative attractiveness of emerging market debt, even a well rated sovereign like India, is inherently compressed.

A renewed spike in US interest rates, a fresh geopolitical shock, or a return of rupee volatility could reverse June’s gains in FII bond inflows relatively quickly, given that FPIs had withdrawn a net Rs 2.63 lakh crore from Indian markets earlier in 2026 before the policy measures were announced.

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Conclusion

The record FII bond inflows in June mark a clear structural shift in how foreign investors view Indian sovereign debt, driven by the removal of capital gains and withholding tax barriers alongside an expanded pool of eligible securities. With the rupee recovering sharply and bond yields easing, the immediate market impact has been positive, though sustained FII bond inflows will likely depend on how US rates evolve and whether India secures the larger prize of Bloomberg index inclusion. This article is for educational purposes and is not investment advice; consult a SEBI-registered investment adviser before making any investment decision.

FAQs on FII Bond Inflows

1. Why did FII bond inflows hit a record in June 2026?

Ans. FII bond inflows surged after the government exempted foreign investors from capital gains and withholding tax on Indian government securities, alongside RBI measures expanding the pool of eligible bonds and easing investment limits.

2. How much did foreign investors put into Indian bonds in June?

Ans. Foreign portfolio investors invested a net Rs 39,640 crore, or about 4.2 billion dollars, into Indian government securities under the Fully Accessible Route in June 2026, an 80 percent jump over the previous record.

3. What tax changes drove the record FII bond inflows?

Ans. The Income-tax (Amendment) Ordinance, 2026 exempted eligible foreign investors from long term capital gains tax and removed the 20 percent withholding tax on interest income from government bonds, effective from 1 April 2026.

4. How have FII bond inflows affected the rupee?

Ans. The rupee recovered from a record low of Rs 96.96 per dollar in late May to around Rs 94.40 by 26 June, tracking closely with the sharp rise in FII bond inflows through the month.

5. What is Bloomberg Global Aggregate Index inclusion and why does it matter?

Ans. It is a major global bond benchmark tracked by an estimated 2.5 to 3 trillion dollars in funds, and India’s potential inclusion could trigger much larger and more structural FII bond inflows than the tactical buying seen so far.

6. Could FII bond inflows reverse from current levels?

Ans. Yes, elevated US Treasury yields, a renewed geopolitical shock or fresh rupee volatility could slow or reverse FII bond inflows, given that FPIs had been net sellers of Indian assets earlier in 2026.