RBI's move to expand FAR likely to boost FPI flows in debt market

FPIs bought over Rs 3,000 crore worth of FAR securities on Friday

The Reserve Bank of India's decision to expand the Fully Accessible Route (FAR) for sovereign papers, and the government’s move to exempt foreign investors from taxes on interest income and capital gains from government securities is expected to improve overseas participation in the domestic bond market, said market participants.

 

The measures come at a time when foreign investor participation in the debt market has shown signs of recovery in the current financial year. Foreign portfolio investors (FPIs) net bought ₹5,262 crore worth of government securities under FAR route in April and ₹5,512 crore in May, followed by inflows of ₹3,395 crore as of June 5.

 

 

On Friday, FPIs bought over ₹3,000 crore worth of FAR securities, following the announcement.

 

“For government securities under the Fully Accessible Route (FAR), we are expanding the universe of ‘specified securities’ by including all new issuances of 15-, 30- and 40-year tenor G-secs (government securities),” RBI Governor Sanjay Malhotra said while announcing the monetary policy decision on Friday.

 

Net FPI flows in G-secs during the previous financial year were largely flat, with periods of both strong inflows and sharp outflows. Market participants said the latest measures could help sustain the positive momentum seen at the start of 2026-27 (FY27).

 

“These measures, along with the government’s decision to exempt foreign investors from paying tax on interest income and capital gains from G-secs, are expected to encourage greater participation by foreign investors in the Indian government bond market, especially on the longer tenure bonds,” said a market participant.

 

Currently, FPIs hold around ₹3.24 trillion of FAR securities, utilising only 6.8 per cent of the available limit. Investors have largely preferred longer-duration bonds, with the average maturity of holdings at around 11 years.

 

The latest measures expand FAR eligibility to all new issuances of 15-year, 30-year and 40-year G-secs. According to the Centre's borrowing calendar, securities worth ₹2.45 trillion fall under these three maturities in the current year. Of this, around ₹90,000 crore has already been issued, leaving about ₹1.5 trillion of upcoming issuances that will now be available under FAR.

 

The RBI has also removed the 30 per cent cap on short-term investments under the general route for foreign investors. Market participants expect shorter-duration bonds to see stronger demand, given expectations that bond yields could rise from current levels.

 

The available headroom for foreign investment under the general route stands at around ₹4.06 trillion.

 

Economists said higher demand for these securities could help lower long-term borrowing costs for the government, improve liquidity in longer-duration bonds and provide support to the rupee through increased capital inflows.

 

The measures could also strengthen India's case for inclusion in a broader set of global bond indices, analysts said, potentially widening the pool of overseas investors tracking Indian debt markets.

 

“By putting new 15-, 30- and 40-year G-secs under FAR, RBI makes more long-tenor bonds freely accessible to foreign investors. Further, it will ensure more FPI demand for G-secs, lower long-end yields, lower government borrowing cost, better liquidity in long-tenor bonds, and some support for rupee. Also, these measures can make India’s case for inclusion in larger Global Bond indices stronger,” State Bank of India said in a report.

 

This month, Bloomberg Index Service will review to consider the inclusion of Indian government bonds into the flagship Global Aggregate Index. In January, a decision on the issue was deferred to allow investors and regulators to evaluate market infrastructure and post-trade operational processes.