The Reserve Bank of India and the Ministry of Finance have overhauled foreign portfolio investment rules for government securities. By eliminating short-term and concentration limits under the General Route, expanding the Fully Accessible Route to long-term bonds, and removing capital gains taxes, India aims to attract massive, long-term global institutional capital.
MUMBAI — The Reserve Bank of India (RBI), in coordination with the Ministry of Finance, has announced a sweeping overhaul of its regulatory framework governing Foreign Portfolio Investors (FPIs) investing in government securities (G-Secs). Released on June 5, 2026, the central bank’s operational revisions eliminate long-standing structural limits for overseas funds and expand the range of tax-free sovereign bonds available to international buyers. The aggressive policy pivot aims to fortify India’s balance of payments, deepen local capital markets, and attract patient, long-term institutional capital amid ongoing global macroeconomic uncertainty and market volatility.
Complete Removal of General Route Investment Restrictions
Under the revised framework details finalized by the Reserve Bank of India, the central bank has abolished three primary operational restrictions that historically constrained foreign asset managers operating under the standard General Route.
Effectively immediately, the short-term investment limit, the concentration limit, and the individual security-wise limit for foreign portfolio investors (FPIs) have been dismantled. Previously, these sub-limits restricted the volume of short-dated debt an FPI could hold and capped maximum exposure to any single sovereign bond issue to prevent sudden capital flight.
While these micro-level restrictions are gone, the RBI confirmed it will retain the macro-level quantitative investment caps. The aggregate ceiling for total foreign portfolio investment remains anchored at 6 percent of the outstanding stock of Central Government securities and 2 percent of the outstanding stock of State Development Loans (SDLs). Furthermore, the separate "general" and "long-term" sub-categories of investment boundaries have been unified into a single streamlined limit for both central and state debt.
Fully Accessible Route Expanded to Long-Term Debt
In a bid to build a smoother domestic yield curve, the government has concurrently expanded the list of specified securities eligible under the Fully Accessible Route (FAR). The FAR scheme, which allows unrestricted foreign investment without any quantitative caps, will now include all new issuances of ultra-long-term Indian government bonds featuring tenors of 15 years, 30 years, and 40 years.
Additionally, Sovereign Green Bonds (SGrBs) matching these designated tenors have been integrated into the FAR eligibility matrix. Officials note that opening long-duration instruments to foreign markets is designed to directly target patient, institutional investment buckets like global pension funds, insurance conglomerates, and sovereign wealth funds (SWFs).
The regulatory changes directly complement the Income-tax (Amendment) Ordinance, 2026, promulgated by the Central Government earlier in the day. The ordinance retrospectively exempts Foreign Institutional Investors and the Bank for International Settlements (BIS) from paying income tax on capital gains or interest income derived from Indian government securities, effective from April 1, 2026.
Official Statement from the Reserve Bank of India
"These measures along with the tax benefits provided by the government this morning should help attract foreign capital for government borrowing," stated RBI Governor Sanjay Malhotra during his monetary policy presentation.
Impact on Global Investors and Capital Markets
The dual benefit of operational deregulation and complete tax exemption is expected to radically alter foreign capital flows into Indian fixed-income markets. So far in 2026, shifting global investment preferences and heightened geopolitical tensions had driven FPIs to pull a net Rs 2,63,784 crore out of Indian capital instruments.
By aligning India’s G-Sec taxation and operational freedom with highly competitive international jurisdictions, the policy reversal removes structural friction for passive index tracking funds. Commercial banks and primary dealers expect an immediate stabilization of foreign exchange inflows, which will insulate the local currency and significantly lower borrowing costs for public infrastructure projects.
Official Sources Section
According to official releases from the Ministry of Finance and statutory notifications published in the Gazette of India, the operational changes are being institutionalized via the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026. All tax exemptions remain legally subject to the condition that participating foreign entities furnish standard investment information in the prescribed compliance format.
Why It Matters
For domestic citizens and consumers, the incoming wall of stable foreign capital relieves pressure on local banks to finance government debt, freeing up commercial credit for private enterprises and household loans. For global asset managers, the elimination of security-wise caps means they can execute large-scale, concentrated sovereign debt strategies in India without violating operational regulatory thresholds.
Key Facts at a Glance
Three Restrictions Abolished: Short-term investment, concentration, and security-wise exposure caps are eliminated under the General Route.
FAR Tenor Expansion: Uncapped investment via the Fully Accessible Route now applies to all new 15-year, 30-year, and 40-year G-Secs and Sovereign Green Bonds.
100% Tax Exemption: Capital gains and interest income on G-Secs are exempt from income tax retrospectively from April 1, 2026.
Macro Caps Unchanged: Aggregate quantitative investment limits are maintained at 6 percent for central G-Secs and 2 percent for state debt.
FAQ Section
Q: What is the primary difference between the General Route and the Fully Accessible Route (FAR)?
A: The General Route subjects foreign investors to aggregate quantitative limits across the total outstanding stock of government debt. The Fully Accessible Route (FAR) features zero quantitative investment restrictions for designated securities, allowing unrestricted global ownership.
Q: Are State Development Loans (SDLs) included in the new absolute tax exemptions?
A: The current Income-tax (Amendment) Ordinance, 2026, specifically targets Central Government securities (G-Secs) and eligible FAR tenors. However, the operational merger of general and long-term categories applies to both central and state-level instruments.
Q: Why did the RBI choose to remove the short-term and security-wise restrictions now?
A: Global market uncertainty and a net outflow of foreign capital earlier in the year prompted a shift toward ease of doing business. Removing these administrative caps makes Indian bonds easily accessible for global index trackers and large sovereign funds.
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