Gsec to FAR: Explaining key terms behind India's global bond index push

The government's tax exemption for foreign investors has put India's bond market in the spotlight. Here's a breakdown of the key terms investors need to know

India's bid to attract more foreign money into its bond market got a boost this month after the government exempted overseas investors from capital gains tax on investments in government securities. The move aims to improve the appeal of Indian bonds and strengthen the country's case for inclusion in major global bond indices such as Bloomberg Global Aggregate Index. 

The tax relief comes as India steps up efforts to integrate its debt market with global financial markets. As discussions around bond index inclusion gather pace, terms such as Gsec, FPIs, FAR and bond yields are increasingly entering the spotlight. Here's what they mean and why they matter.

 

Gsec

A Gsec, or government security, is a debt instrument issued by the central government to borrow money from investors. 

When investors buy a Gsec, they are effectively lending money to the government in return for periodic interest payments and repayment of principal at maturity. Since they carry sovereign backing, these securities are considered among the safest investments in India. 

Gsecs come in various maturities, ranging from short-term Treasury Bills to long-term bonds extending up to 40 years.

Bond

A bond is a fixed-income instrument through which an issuer — such as a government or company — raises funds from investors. 

In return, the issuer agrees to pay interest, known as a coupon, and repay the principal amount on a specified date. Bond prices and yields move in opposite directions: when bond prices rise, yields fall, and vice versa.

Yield

Yield refers to the return an investor earns from holding a bond. 

The benchmark 10-year government bond yield is closely watched because it influences borrowing costs across the economy. Lower yields generally indicate stronger demand for bonds and can help reduce financing costs for both governments and businesses.

FPI

Foreign Portfolio Investors are overseas investors — such as pension funds, sovereign wealth funds, mutual funds and insurance companies — that invest in financial assets in another country. 

Unlike foreign direct investment (FDI), FPIs do not take a controlling stake in businesses. Instead, they invest in stocks, bonds and other market instruments. 

India has gradually eased access for FPIs to its debt market to attract stable foreign capital and improve market liquidity.

Capital gains tax

Capital gains tax is levied on the profit earned when an investor sells an asset at a higher price than it was purchased for. 

Until recently, foreign investors in Indian government securities were liable to pay capital gains tax on profits from bond sales. The government's decision to exempt such gains is aimed at making Indian bonds more competitive with those of countries that offer favourable tax treatment to overseas investors.

Withholding tax

Withholding tax is a tax deducted at source on income earned by a foreign investor, such as interest payments on bonds. 

India had earlier reduced withholding tax on certain foreign investments in government securities to encourage overseas participation. Lower tax costs generally improve the net returns earned by foreign investors.

FAR

The Fully Accessible Route, or FAR, is a framework introduced by the Reserve Bank of India in 2020 that allows non-resident investors to purchase specified government securities without being subject to foreign investment limits. 

Before FAR, overseas investment in government bonds was capped under separate quotas. FAR-eligible securities can be freely bought by foreign investors, making them more attractive to global index providers and international funds. 

The bonds included in global indices are largely FAR-eligible securities.

Long-tenor bonds

Tenor refers to the time remaining until a bond matures. 

Long-tenor bonds are securities with relatively long maturities, often 10 years or more. They are popular among pension funds, insurance companies and sovereign wealth funds seeking stable, long-term returns. 

India has been increasing the share of long-tenor government securities in recent years, helping create a deeper market for global investors.

Bloomberg Global Aggregate Index

The Bloomberg Global Aggregate Index is one of the world's most widely tracked fixed-income benchmarks. 

It includes government, corporate and securitised bonds from multiple countries and serves as a reference for global fund managers overseeing trillions of dollars in assets. 

When a country’s bonds enter the index, passive funds that track the benchmark are typically required to buy those securities, leading to inflows.

BIS (Bank for International Settlements)

The Bank for International Settlements is an international financial institution owned by central banks. 

Headquartered in Basel, the BIS promotes monetary and financial stability and serves as a forum for cooperation among central banks. Some global bond indices use BIS data and classifications while assessing sovereign debt markets.

Passive funds

Passive funds are investment vehicles designed to replicate the performance of a benchmark index rather than actively select securities. 

When Indian bonds are added to a global index, these funds automatically allocate money to eligible securities in proportion to their index weight. 

This creates predictable capital inflows and broadens the investor base.