Forex measures, FII bond tax leeway could attract $60-80 bn, Pg13

Key Highlights:

• The Government of India and the Reserve Bank of India (RBI) recently announced measures to attract an estimated $60-80 billion in foreign capital.
• Key steps include scrapping capital gains and withholding tax on Foreign Institutional Investors (FIIs) in government debt.
• New facilities introduced are concessional Foreign Currency Non-Resident (Bank) (FCNR(B)) deposits and a forex swap facility for Public Sector Undertakings (PSUs) External Commercial Borrowings (ECBs).
• These initiatives aim to address a potential Balance of Payments (BoP) deficit and stabilize the Indian Rupee.

Detailed Insights:

• The removal of capital gains and withholding taxes on government bonds is projected to attract $20-25 billion, potentially leading to inclusion in Bloomberg's indices.
• FCNR(B) deposits, with the RBI bearing the full hedging cost for 3-5 year deposits, are estimated to bring in $30-35 billion.
• The concessional forex swap facility for PSU ECBs (3-5 year tenure) could attract an additional $10-20 billion.
• The combined impact of these facilities is estimated at $50-55 billion, contributing to total inflows of $60-80 billion over 12-18 months.
• These measures are crucial given the Rupee's depreciation and rising domestic yields, making Indian debt attractive to FIIs.
• India recorded a BoP deficit of $30.8 billion in 2025-26, highlighting the urgency of these capital inflow measures.
• The government might consider issuing foreign currency sovereign bonds as a supplementary measure to finance the fiscal deficit and ease domestic yield pressure.
• A similar FCNR(B) mobilization in 2013 successfully attracted approximately $26.6 billion, providing a historical precedent for current estimates.

Key Concepts Involved:

• Foreign Institutional Investors (FIIs): Overseas entities investing in a country's financial markets.
• Balance of Payments (BoP): A record of all economic transactions between a country and the rest of the world.
• FCNR(B) Deposits: Foreign Currency Non-Resident (Bank) deposits, allowing Non-Resident Indians to hold deposits in foreign currency.
• External Commercial Borrowings (ECBs): Loans raised by eligible resident entities from recognized non-resident entities.
• Withholding Tax: Income tax deducted at source from payments like interest or dividends to non-residents.
• Capital Gains Tax: Tax on profit realized from the sale of a non-inventory asset.