From tax exemption to FCNR(B) deposits: How India is trying to attract foreign capital

As the rupee came under pressure from rising crude oil prices, geopolitical tensions in the Middle East and sustained foreign portfolio investor (FPI) outflows, the government and the Reserve Bank of India rolled out a set of measures over Friday and Monday aimed at attracting foreign capital and strengthening India's external position.

The RBI, while keeping the repo rate unchanged at 5.25% in its June monetary policy review, unveiled a package to boost dollar inflows. Simultaneously, the government followed up with a tax ordinance exempting foreign investors from taxes on investments in government securities.
Together, the measures are designed to improve India's balance of payments, ease pressure on the rupee and make Indian debt markets more attractive to overseas investors.


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So, why were policymakers worried?

The West Asia conflict and its impact globally is no secret. The ripple effects are real.
The rupee had come under pressure in recent weeks trading in the range of ₹95.20 to ₹95.80 against the US Dollar as crude oil prices surged following the escalation of the Iran-Israel conflict, raising concerns over India's import bill and current account deficit. However, a surprise sprang on Monday when India reported a current account surplus of $7.1 billion in the fourth quarter of FY26.

The RBI's package

1. Concessional forex swap facility for overseas borrowings
The RBI introduced a special dollar-rupee swap facility at a concessional rate for public sector entities and banks raising funds overseas. The facility will remain available until September 30.

Companies often borrow abroad but must hedge currency risk. Hedging can be expensive. By lowering that cost, the RBI is encouraging more overseas borrowing and, consequently, more dollar inflows into India.

2. RBI to bear hedging costs on FCNR(B) deposits
On Monday, the RBI issued detailed guidelines for the FCNR(B) deposit scheme announced during the monetary policy.

Also Read: Deposits under RBI's latest foreign currency non-resident bank scheme will carry one-year lock-in

Under the framework, banks can mobilise fresh FCNR(B) deposits with maturities of three to five years between June 8 and September 30 and swap the dollar inflows with the RBI. The swap window will remain available until October 16. The central bank will bear the entire hedging cost, effectively allowing banks to hedge these deposits at par. Banks can also offer leverage against such deposits.

The RBI also exempted these deposits from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements, improving the economics of mobilising foreign currency deposits.
To ensure stability of inflows, deposits raised under the scheme will carry a mandatory one-year lock-in period. Banks will not be allowed to cancel swaps undertaken with the RBI before maturity. The RBI further exempted swap positions arising from FCNR(B) deposits from net unhedged foreign exchange exposure calculations.

This is the closest India has come since the 2013 FCNR(B) mobilisation scheme launched during the rupee crisis. By eliminating hedging costs, providing CRR and SLR relief, relaxing regulatory treatment and offering a dedicated swap window, the RBI is giving banks a strong incentive to attract dollar deposits from overseas Indians.

Why analysts think this scheme could be bigger than 2013
Brokerage Jefferies believes the latest package could attract $50-70 billion of foreign currency inflows, substantially higher than the inflows generated under the 2013 FCNR(B) scheme.

The brokerage argues that the current framework is more attractive than the one introduced during the rupee crisis more than a decade ago. While banks had to bear hedging costs of around 3.5% under the 2013 scheme, the RBI is now absorbing the entire cost. The deposits are also exempt from CRR and SLR requirements, similar to the earlier programme.

A key difference this time is the ability to use leverage. Jefferies noted that the RBI has permitted banks to provide standby letters of credit (SBLCs), potentially allowing depositors to amplify returns through leverage. According to the brokerage, this could significantly improve the attractiveness of FCNR(B) deposits for overseas investors.

3. Expansion of the Fully Accessible Route (FAR)
The RBI expanded the FAR framework to include all new 15-year, 30-year and 40-year government securities and removed concentration limits for foreign investors.

Large global investors, including pension and sovereign funds, prefer long-dated bonds. The move widens the universe of Indian government securities available for unrestricted foreign investment.

4. Easier access for non-resident investors
The RBI broadened investment access for individuals residing outside India and eased certain norms governing non-resident participation in Indian markets.

The measure aims to tap a larger pool of overseas capital, particularly from the Indian diaspora.

The Government's follow-up Tax relief

After the RBI's measures, the government issued the Income-tax (Amendment) Ordinance, 2026.

5. Capital gains tax exemption on government bonds
The ordinance exempted foreign institutional investors and the Bank for International Settlements from capital gains tax on investments in specified government securities. Earlier, long-term gains attracted a 12.5% tax.

6. Interest income tax exemption
The government also removed taxes on interest income earned by eligible foreign investors from these government securities. Previously, interest income faced a 20% withholding tax.