Big Relief For FPIs: RBI Opens Long-Term Bonds As Govt Prepares Major Capital Gains Tax Exemption

Reserve Bank of India’s (RBI) monetary policy review shifted entirely to aggressive capital market changes on Friday, as the central bank rolled out massive operational relief to draw foreign portfolio investors (FPIs) back into domestic debt channels.

While the Monetary Policy Committee (MPC) kept the benchmark repo rate frozen at 5.25%, Governor Sanjay Malhotra launched a major policy offensive to make Indian government bonds highly profitable for global funds, acting defensively as geopolitical shocks trigger aggressive capital flight from emerging markets.

FAR Channel for Ultra-Long Bonds

Governor Malhotra announced that the central bank is expanding the operational window under the Fully Accessible Route (FAR), which allows unlimited foreign investment without local caps, to include ultra-long-term papers. Previously, FPI access under the FAR route was primarily concentrated on short- to medium-term instruments with tenors up to 10 years.

"For government securities under FAR, which is the Fully Accessible Route, we are expanding the universe of specified securities by including all new issuances of 15, 30, and 40-year tenure G-Secs,” said Sanjay Malhotra, RBI Governor. 

The expansion is designed to lock in long-term, patient foreign institutional capital at a time when global fund managers are heavily rebalancing their portfolios away from risky assets.

Structural Overhaul for FPIs

The government is also notifying the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026, to streamline market access:

• Equity Liberalization: Individual Persons Resident Outside India (PROIs) can now invest in listed Indian equities through the Portfolio Investment Scheme. Individual limits have been raised to 10% per company, with an aggregate limit for all PROIs increased to 24%.
• General Route Simplification: Three core restrictions, short-term investment limits, concentration limits, and security-wise limits, have been removed for FPIs. Additionally, 'general' and 'long-term' investment sub-categories are now merged to provide greater flexibility.

Tax Rationalization 

In a major fiscal boost, the government has moved to exempt FPIs from income tax on interest and capital gains arising from investments in Government Securities. Effective from April 1, 2026, this exemption, which also applies to the Bank for International Settlements (BIS), aligns India’s tax regime with competitive international markets. By eliminating this operational friction, the government aims to maximize net-of-tax yields for global index-tracking funds, ensuring a systematic inflow of durable foreign capital.

Defending Rupee

The sudden acceleration of FPI debt relief points directly to the central bank's focus on defending the Indian rupee. With Brent crude oil prices climbing to $95 per barrel amid the ongoing West Asia crisis, India's current account deficit faces immediate pressure.

Governor Malhotra pointed out that global supply chain disruptions and high energy inputs continue to weigh heavily on macro projections, forcing a downward revision of India's FY27 GDP growth forecast to 6.6%.

The wave of anticipated FPI inflows will create a reliable dollar buffer, capping domestic borrowing costs and absorbing global currency shocks without requiring the central bank to burn through its formal forex reserves aggressively.

Also read: RBI MPC Keeps Policy Repo Rate Unchanged At 5.25%