The government has introduced retrospective tax exemption for Foreign Institutional Investors (FIIs) earning income from government securities, a policy shift aimed at boosting foreign participation in the country's sovereign debt market.
Announced on June 5, the Income-tax (Amendment) Ordinance seeks to waive taxes on interest income and any capital gains resulting from the sale, exchange, or transfer of these government securities. This tax relief is backdated to take effect from April 1, 2026.
Hailing the move, Ashima Goyal, Ex Member of MPC, RBI noted that markets were concerned about India's balance of payments position, as the country has been running an overall deficit despite having strong foreign exchange reserves.
"I think markets were nervous that is why they need they needed something and this gives them something because although foreign exchange reserves remain very large. But for the last 2 years, we've been seeing that there's an overall balance of payment deficit. So, the fear was that they won't be there are not enough and large equity outflows," she said.
Goyla further mentioned that this has typically happened in the past whenever there has global risk aversion. This time it has been a prolonged due to tariffs and oil shocks.
The measure is seen as reassuring because it could attract more foreign inflows and help narrow the deficit. Additionally, as per Goyal, with the rupee currently undervalued in real terms, foreign investors could benefit both from tax incentives and potential gains if the currency appreciates.
"Measure that reassures markets that this balance of payment deficit is likely to be to to disappear now, given that will improve inflows into India. The interesting thing is that the rupee is highly depreciated in real terms," Goyal said.
She added, "in all past episodes, we have seen when it (rupee) reaches such levels, it reverses. Now, if these inflows come in and the rupee reverses, that will give them double returns because not only will they gain from tax exemptions, but coming in at a lower rupee and gaining from a higher rupee will give them major returns. So, it's a a double benefit for them."
Meanwhile, Radhika Rao senior economist and executive director at DBS Bank said, "the kind of the toolkit that could be used but the central bank and the government have rightly used everything that was announced essentially I think showing uh you know that all efforts you know all hands around deck in terms of wanting to attract inflows."
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