Central bank announces host of measures to attract foreign capital

UPSC Study Note — Prelims + Mains

1. At a Glance

• Reserve Bank of India (RBI) announced a coordinated package of capital-account liberalisation measures on 5 June 2026 to attract foreign inflows amid sustained FPI outflows. [1]
• The package covers three channels: Government Securities (G-secs) via the Fully Accessible Route (FAR), Foreign Portfolio Investment (FPI) limits under the General Route, and NRI/OCI equity investment limits. [1][2]
• Directly relevant to UPSC GS-III (Indian Economy — capital markets, external sector, monetary policy) and GS-II (government policies). High probability of Prelims MCQs on FAR tenors, General Route restrictions, and NRI/OCI definitions. [1]
• The measures signal RBI's dual intent: rupee stabilisation and deepening India's G-sec market for global indices participation. [3]

2. Why in the News

• Between 1 April 2026 and 2 June 2026, FPIs made a net withdrawal of $13.4 billion from equities and $0.3 billion from debt markets — triggering policy response. [1]
• RBI Governor announced the measures on 5 June 2026 as part of the Monetary Policy Statement / accompanying developmental measures. [1][3]
• Measures were also complemented by a Government of India decision to exempt G-sec interest income from tax for certain categories of foreign investors, announced around the same date. [4]
• Context: Rupee depreciation pressure, global risk-off environment, and India's aspirations for JP Morgan / FTSE G-sec index inclusion retention and expansion. [3]

3. Background & Evolution

4. Core Static Facts

A. Fully Accessible Route (FAR)

B. FPI — General Route

C. NRI / OCI / PROI Equity Investment

D. External Commercial Borrowings (ECBs) — Incentive Scheme

E. Key Definitions

• FPI (Foreign Portfolio Investor): Entity registered with SEBI investing in Indian securities (equity/debt) below 10% of paid-up capital of a company; above 10% = FDI.
• FAR: Specified G-secs open to unrestricted non-resident investment — no ceiling on amount or individual holding.
• General Route: FPI investment in G-secs subject to quantitative ceilings (previously: % of outstanding stock; short-term cap; concentration limits).
• NRI: Indian citizen residing outside India.
• OCI: Person of Indian Origin holding OCI card (merged with PIO in 2015).
• PROI: Broader category — any person resident outside India under FEMA.
• PIS (Portfolio Investment Scheme): RBI-designated route for NRI/OCI purchase/sale of shares/convertible debentures on recognised stock exchanges.
• ECB (External Commercial Borrowing): Borrowing by Indian entities from foreign sources — governed by RBI's ECB framework under FEMA.

5. Multi-Dimensional Analysis

Economic

• FAR expansion to longer tenors (15/30/40-year) aligns with India's yield-curve deepening objective — creates a more liquid long-end benchmark. [1]
• Estimated combined measures (RBI + GoI tax exemption) could attract $45–80 billion in foreign inflows. [4]
• FPI outflows of $13.7 billion (Apr–Jun 2026) created rupee depreciation pressure; these measures are a direct forex stabilisation tool. [1][3]
• Lower concentration limits under General Route removal reduces home-bias distortion in sovereign bond markets.

Geopolitical / Strategic

• India's inclusion in JP Morgan EM Bond Index (June 2024) and Bloomberg EM Index makes FAR-eligible G-secs internationally benchmarked instruments — any restriction increases tracking error for global funds. [3]
• Expanding PIS to all PROIs (beyond just NRIs/OCIs) is a diaspora engagement + capital mobilisation strategy.
• Concessional ECB swap for PSUs signals preference for sovereign-linked, controlled forex inflows over purely speculative hot money. [1]

Legal / Constitutional

• All measures operate under FEMA, 1999 (Foreign Exchange Management Act) — RBI is the delegated authority for capital account transactions.
• Government Securities Act, 2006 governs the issuance and holding of G-secs, including FAR-eligible bonds.
• SEBI (Foreign Portfolio Investors) Regulations, 2019 govern FPI registration and investment limits; General Route changes require coordination between RBI and SEBI.
• PIS is notified under Schedule 3 of FEMA (Non-Debt Instruments) Rules, 2019.

Administrative / Governance

• Dual-regulator complexity: RBI regulates debt/forex while SEBI regulates equity markets — NRI/OCI PIS changes sit at this interface.
• Removal of General Route sub-limits reduces compliance burden for custodians and FPIs — operationally significant for index-tracking funds.
• Concentration limits (previously: single FPI not to hold more than a specified % of any security) removal may raise systemic risk concerns around investor concentration.

Historical

• India's incremental capital account liberalisation model (vs. full convertibility) has been the RBI's consistent philosophy since the Tarapore Committee Reports (1997, 2006) on Full Capital Account Convertibility (FCAC) — which recommended caution.
• The current FAR expansion echoes the 2013 Rajan Committee recommendation for a "seamless" G-sec market open to foreign investors.

6. Recent Developments (Last 12–18 Months)

• June 2024: JP Morgan EM Bond Index inclusion went live for India — FAR bonds eligible; initial inflow surge. [3]
• FY 2025–26: FPI net sellers in FAR G-secs for much of the year; trend reversal attempted through successive RBI measures. [1]
• Apr–Jun 2026: Net FPI outflow of $13.7 billion (equities $13.4 bn + debt $0.3 bn). [1]
• 5 June 2026: RBI announces current package — FAR expanded (15/30/40-year), General Route caps removed, NRI/OCI/PROI PIS limits raised, ECB concessional swap till Sep 2026. [1][2]
• ~6 June 2026: Government of India announces tax exemption on interest income from G-secs for specified foreign investors — complementary fiscal measure. [4]

7. Prelims Hooks

1. FAR (Fully Accessible Route) for G-secs was introduced by RBI in March 2020. [5]
2. Under the June 2026 package, FAR was expanded to include all new issuances of 15-year, 30-year, and 40-year G-secs. [1][2]
3. Three specific limits removed under the General Route for FPIs: (i) short-term investment cap, (ii) concentration limit, (iii) individual securities limit. [1]
4. NRI = Indian citizen abroad; OCI = Person of Indian Origin with OCI card; PROI = broader — any person resident outside India under FEMA. [2]
5. The Portfolio Investment Scheme (PIS) is the RBI-designated route for NRI/OCI equity investment on Indian stock exchanges. [2]
6. As of June 2026, PIS was extended to all individual PROIs, not just NRIs and OCIs. [2]
7. The concessional foreign exchange swap facility for ECBs by PSUs is valid till 30 September 2026. [1]
8. FPIs withdrew a net $13.4 billion from Indian equities between 1 April and 2 June 2026. [1]
9. SEBI (FPI) Regulations, 2019 govern FPI registration; the General Route operates under these regulations co-administered with RBI. [2]
10. India's G-secs were included in the JP Morgan Emerging Market Bond Index from June 2024 — FAR bonds are the qualifying instrument. [3]
11. FAR investment has no quantitative ceiling — distinguishing it from the General Route which had sub-limits. [1]
12. Regulator for PIS: RBI; regulator for FPI equity purchases via registered route: SEBI. [2]
13. The estimated combined government + RBI measures could attract $45–80 billion in foreign inflows (analyst estimate). [4]

8. Mains Relevance

Plausible Mains Questions:

1. "The RBI's Fully Accessible Route (FAR) is India's most significant step towards capital account liberalisation in G-secs. Critically examine its design, recent expansion, and implications for India's sovereign debt market." (GS-III, 15 marks)

2. "Discuss the challenges and opportunities arising from large-scale foreign portfolio investment in Indian government securities. How do the measures announced in June 2026 address structural concerns?" (GS-III, 10 marks)

3. "What is the Portfolio Investment Scheme (PIS)? In the context of the June 2026 RBI measures, evaluate the significance of extending PIS to all Persons Resident Outside India." (GS-III, 10 marks)

9. Related Topics to Study Next

10. Common Errors / Trap Areas

1. FAR ≠ General Route: FAR has no ceiling; General Route has/had quantitative sub-limits. Aspirants often conflate the two or assume FAR is a sub-category of the General Route — it is a parallel, unrestricted route. [1]

2. NRI ≠ OCI ≠ PROI: NRI is a tax/FEMA status (citizen abroad); OCI is a citizenship-linked status (PIO with lifetime visa); PROI is the broadest FEMA category (any person outside India, including foreign nationals). The June 2026 extension to PROIs is a significant broadening — do not restrict it to NRI/OCI only. [2]

3. Regulator confusion: RBI regulates debt securities and forex (FAR, PIS, ECB); SEBI regulates equity portfolio investment (FPI registration). The NRI/OCI PIS change sits under RBI, not SEBI. [2]

4. FAR inception year: FAR was introduced in March 2020, not 2023 (year of JP Morgan announcement) or 2024 (year of actual inclusion). The two events are distinct. [5]

5. G-sec tax exemption ≠ RBI measure: The interest income tax exemption on G-secs for foreign investors is a Government of India / MoF fiscal measure — not an RBI announcement. Both were announced around the same time (June 2026) but come from different authorities. [4]