Tax relief unlikely to boost foreign bond inflows, says SBI Funds
SBI Funds expects muted foreign flows into Indian bonds despite tax removal, citing global yields, RBI pause, and rupee expectations.
Foreign investment into Indian government bonds is likely to stay subdued in the near term, even after the removal of taxes on overseas purchases of sovereign debt, according to SBI Funds Management.
In its August 2026 Market Outlook, the fund house noted that the deferment of India's inclusion in a global bond index could further limit incremental foreign portfolio investment. "With the index inclusion being deferred, one should anticipate muted incremental flows into Indian bonds in the near term from FPIs," the report said.
SBI Funds said the tax relief alone may not be enough to significantly improve foreign demand. "Even with the removal of taxes on overseas purchases of sovereign bonds, relative yield differential and the current state of the policy cycle and INR expectations do not provide much comfort with respect to prospects of debt flows," it said, adding that any flows would likely be tactical, guided by currency expectations.
The assessment comes as SBI Funds expects the Reserve Bank of India to maintain an extended pause on interest rates, with any normalisation of policy rates pushed further out. Analysing the RBI's August policy guidance, the report noted that while the one-year-ahead CPI inflation projection remains at 5.3 per cent and average headline inflation for FY27 is projected at 5 per cent, the central bank's reference to core inflation being around its 4 per cent target provides room to keep rates unchanged.
"The policy stance seems to suggest a prolonged pause on policy rates with normalisation of policy rates likely to be pushed out further," SBI Funds said. The repeated emphasis on core inflation also indicates greater tolerance for headline inflation staying above the 4 per cent target, even as the RBI reiterates its medium-term objective.
Global interest rates remain another challenge. SBI Funds said weaker fiscal conditions and inflation above target in several developed economies could keep global bond yields elevated. "Weaker fiscal direction as well as a prolonged period of above-target inflation in most developed markets continues to support the case for higher global yields for a while longer," the report said, adding that domestic interest rates are likely to receive little support from external flows in the near term.