A couple of weeks ago, many were calling the FPI tax exemption on G-Secs a giveaway.
Since then, FPIs have bought roughly ₹33,000 crore worth of government bonds, and the 10-year G-Sec yield has fallen from 6.98% to 6.84%. Lower bond yields mean the government can borrow at a lower cost. If sustained, it can also ease funding costs across the financial system.
What stands out is how predictable the reaction was. Remove a tax friction, improve post-tax returns, and more capital shows up.
Too early to call it a long-term success, but the market’s initial verdict has been pretty clear.
People are lauding this move but RBI didn’t have any other option than to forgo the tax on the bonds to make them attractive for the foreigners. This move was a big sacrifice on India’s part and the long term repercussion of this move would be that it would be very difficult to impose this tax again in the future because the outcome would just be the flight of dollars out of the country. This is looking good at the moment but this is a huge compromise India has done. This also means the even if the inflation moves up because the bond yields would be lower the interest rates in India won’t move up and Indian citizens will have to bear the cost of inflation and still lower interest rates on deposits resulting in even lower quality of life for them
Valid point. I’d just separate two things: attracting foreign capital and setting interest rates. The first can influence the bond market, but RBI can still raise rates if inflation becomes a problem.
Well put. The problem is differential rates essentially robbing Indian savers to pay for foreign capital.