India Unleashes Dual Strategy to Attract Foreign Capital, Bolster Rupee Amidst Global Headwinds

A Proactive Stance Amidst Global Uncertainties

In a decisive move to fortify its financial markets and stabilize the domestic currency, India has rolled out a comprehensive package of measures from both the Reserve Bank of India (RBI) and the Central Government. These coordinated policy shifts, enacted within the last week, aim to reverse persistent capital outflows and attract a fresh wave of foreign investment, signaling India's proactive approach to managing external vulnerabilities amidst a challenging global economic landscape.

The urgency for these interventions stems from a period marked by significant foreign portfolio investor (FPI) outflows. Between April 1 and June 2, 2026, FPIs collectively withdrew a net of approximately $13.4 billion from Indian equities, coupled with a $0.3 billion outflow from debt markets. This capital flight, combined with elevated crude oil prices and ongoing geopolitical tensions, has exerted considerable pressure on the Indian rupee, which recently traded near ₹95 against the US Dollar. Such depreciation risks exacerbating imported inflation and widening the current account deficit, necessitating a robust policy response.

RBI's Five-Pronged Approach to Capital Inflows

The Reserve Bank of India, in its strategic intervention, introduced a five-point plan designed to enhance the attractiveness of Indian markets for foreign investors and improve foreign exchange liquidity. These measures, effective from early June 2026, target various segments of capital flows:

  1. Expanded Fully Accessible Route (FAR): The RBI has broadened the scope of the Fully Accessible Route, which allows foreign investors to purchase Indian government bonds without any limits. This expansion now includes all new issuances of 15-year, 30-year, and 40-year government bonds, aiming to attract more stable, long-term foreign capital into the sovereign debt market.
  2. Relaxed FPI Regulations: Restrictions on short-term investments, concentration limits, and individual security-wise investment limits for FPIs investing through the General Route have been removed. This simplification makes it considerably easier for foreign funds to navigate and invest in Indian bonds, reducing regulatory friction.
  3. Enhanced NRI and OCI Investment Limits: Investment limits for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) in listed equity instruments have been enhanced, allowing them greater flexibility without requiring prior registration with SEBI. This move aims to tap into the Indian diaspora's investment potential more effectively.
  4. Special Forex Incentives: To encourage external commercial borrowings (ECBs) and foreign currency non-resident (bank) [FCNR(B)] deposits, the central bank introduced concessional forex swap and hedging facilities. These facilities are valid until September 30, 2026, and specifically target ECBs raised by public sector undertakings and FCNR(B) deposits mobilized by banks. Furthermore, the government has committed to bearing the cost of ECB hedging, alongside exempting FCNR(B) deposits from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements for a limited period, sweetening the deal for banks to attract these deposits.
  5. Export-Related Easing: While less detailed in the immediate announcements, supplementary measures were also introduced to ease export-related norms, further supporting the foreign exchange inflow mechanism.

Government's Progressive FEMA Amendments

Complementing the RBI's initiatives, the Central Government, through the Department of Economic Affairs, notified key amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, on June 12, 2026. These amendments significantly broaden the accessibility of Indian equities for individual foreign investors:

  • Widened Investor Base: The existing provisions, previously limited to NRIs and OCIs, have been expanded to include all "individual persons resident outside India" (PROIs). This landmark change opens the door for a much broader global retail and individual investor base to participate in the Indian stock market through the portfolio investment scheme.
  • Increased Investment Caps: The permissible individual investment limit for a PROI in any listed Indian company has been doubled from 5% to 10% of the total paid-up equity capital. Concurrently, the overall investment cap for all such individual PROIs in a single Indian company has been raised substantially from 10% to 24% of the total paid-up equity capital. This allows greater foreign individual ownership and is expected to boost liquidity.
  • National Security Safeguards: Crucially, the amendments retain safeguards, stipulating that investments or transfers resulting in ownership or control of a listed Indian company by entities or citizens of countries sharing a land border with India will require prior government approval. This aligns with India's established foreign direct investment (FDI) policy.

Market Implications and Outlook

These dual policy thrusts are expected to have profound implications for India's financial markets. Analysts at Jefferies project that this comprehensive package could attract foreign flows of nearly $70 billion into India, providing substantial support to the rupee and bolstering India's foreign exchange reserves. Furthermore, the expansion of the FAR list and the easing of FPI norms for government bonds are seen as crucial steps towards India's inclusion in the Bloomberg Global Aggregate Bond Index, which could unlock significant passive fund inflows. India's bonds are already part of JP Morgan and FTSE Russell bond indices.

For the equity market, the widened access and higher investment limits for individual foreign investors are likely to enhance liquidity and potentially lead to re-ratings for companies, especially large-cap stocks and those with currently lower foreign shareholding. This strategic alignment of monetary and fiscal policy underscores India's commitment to maintaining financial stability and attracting critical capital, positioning the nation to navigate global economic uncertainties with greater resilience and to continue its trajectory towards a $7 trillion economy.

Balaji K

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