Foreign flows into Indian bonds to stay muted despite tax relief: SBI Funds

Foreign portfolio investment (FPI) flows into Indian government bonds are expected to remain subdued in the near term despite recent tax relief, according to SBI Funds Management’s August 2026 Market Outlook. The firm projects limited incremental inflows, even with the removal of taxes on overseas purchases of sovereign bonds.

Key factors weighing on FPI flows SBI Funds identified the deferment of India’s inclusion in a global bond index as a primary constraint. The postponement is anticipated to curb incremental foreign investment in Indian bonds. Additionally, elevated global bond yields, driven by weaker fiscal conditions and above-target inflation in several developed economies, are likely to reduce the attractiveness of Indian sovereign bonds.

Domestic policy and inflation outlook The Reserve Bank of India (RBI) is expected to maintain steady interest rates for an extended period, with any normalization of policy rates pushed further out. The central bank’s emphasis on core inflation suggests a higher tolerance for headline inflation remaining above the 4% target. This stance, combined with steady domestic rates, provides little support for external flows into local bonds.

Tax relief insufficient to boost demand While the removal of taxes on overseas purchases of sovereign bonds was introduced as a measure to attract foreign investors, SBI Funds stated that the relief alone may not be enough to substantially improve demand. Relative yield differentials, the current policy cycle, and expectations around the Indian rupee (INR) do not offer strong incentives for debt flows, according to the report.

Near-term outlook Despite the tax changes, foreign investment flows into Indian government bonds are projected to stay muted. Elevated global yields and the deferred index inclusion are expected to keep external inflows limited in the near term.