Reforms to Broaden the Foreign
Capital Base and Support the Indian Rupee:
India's June 2026 Reforms

In June 2026, the Government of India and the RBI announced a series of reforms intended to widen foreign participation and support the currency, against the backdrop of a sharp fall in the rupee driven by geopolitical tensions. The most recent of these is the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026, which widens the eligible investor class from NRIs and OCIs to any individual resident outside India. The change is significant for the direct access it grants foreign individuals to listed Indian equity on a repatriation basis. Together, the measures form a coordinated effort to widen and diversify the sources of foreign capital.

1. Listed-equity access opened to all foreign individuals, holding cap doubled

The Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026, notified as S.O. 3030(E) on 12 June, amend Rule 12 read with Schedule III of the 2019 NDI Rules. The Portfolio Investment Scheme, previously open only to NRIs and OCIs, now admits any individual resident outside India on a repatriation basis, and the individual holding ceiling rises from 5% to below 10% of paid-up capital.

Conditions: 

• An individual crossing the 10% ceiling must divest within five trading days, failing which the holding is reclassified as foreign direct investment and further portfolio investment in that company is barred.
  
• Where a transfer would pass ownership or control to interests from a country sharing a land border with India, prior Government approval applies, with beneficial ownership assessed.

The conditions above keep the route within portfolio limits and preserve the Government’s power to review any change of control, so it widens individual participation without loosening control over strategic ownership.

Direct impact: 

• The amendment creates a direct, repatriable route into Indian listed equity for a class of investor that previously had none. A foreign individual of non-Indian origin could earlier reach Indian equity only through the FPI route or a pooled fund; they may now hold in their own name. 
  
• For investee companies, foreign-individual ownership capacity widens, and the 24% aggregate ceiling applies directly, without the special resolution the earlier rule required to move beyond 10%.

Gaps that remain:

While permitting foreign citizens to invest in listed securities is a positive policy measure, its success will largely depend on the ease of investor onboarding. Simplifying and expediting account opening and compliance processes for foreign investors will be essential to facilitate meaningful participation and fully realize the intended benefits of the reform.

2. Tax exemption on foreign-investor income from government securities

Through the Income-tax (Amendment) Ordinance, 2026, the Government has exempted Foreign Portfolio Investors (FPIs), Foreign Institutional Investors (FIIs), and the Bank for International Settlements (BIS) from tax on income from government securities. The exemption applies retrospectively from 1 April 2026 and covers interest income and capital gains on the transfer or redemption of G-Secs. 

Direct impact: 

• The exemption raises the post-tax return to foreign holders of Indian sovereign debt, putting India on par with peer markets such as Indonesia, Brazil, and South Africa, where foreign investors are taxed more lightly. Foreign investors put more than ₹13,200 crore into G-Secs through the Fully Accessible Route (FAR) in the first fortnight of June, taking FAR inflows to nearly ₹28,000 crore in 2026 YTD, even as equity recorded heavy outflows over the same period.
  
• FPIs hold about ₹3.75 lakh crore of G-Secs, or 3.34% of the outstanding stock, of which ₹3.21 lakh crore sits in the FAR and ₹54,091 crore in the General Route, so the headroom is large. 

Gaps that remain:

• The exemption is a welcome step and sits well with foreign investors with patient capital, however, it only reaches debt. Foreign equity flows have been negative over the last few years, with net outflows of ₹1.66 lakh crore in 2025 and 2.87 lakh crore so far in 2026. Amongst various reasons like shifting global interest rates, geopolitical tensions, and an expensive domestic valuation structure, one major reason attributable to Net, Outflow is high tax burden.
  
• Introduced in 2004 as a modest transactional levy to broaden the tax base and curb tax evasion, the Securities Transaction Tax (STT) was accompanied by an exemption for long-term capital gains (LTCG) on listed securities. Over time, however, this framework has evolved into a dual-layer taxation regime. Since the reintroduction of LTCG tax in 2018, investors have been subject to both STT and capital gains tax. Further, the Union Budget 2024 increased the tax rates on capital gains, raising the long-term capital gains tax rate to 12.5% and the short-term capital gains tax rate to 20%, thereby further increasing the overall tax burden on securities transactions. The compounding effect of a 12.5% capital gains tax on top of an unyielding STT has turned India into an expensive outlier for global equity managers as compared to its regional peers.

3. Uncapped FCNR and NRE deposit rates for NRIs

The RBI has lowered the cost to banks of raising foreign-currency deposits from non-resident Indians and removed the ceiling on the rates they may offer. By a circular dated 8 June 2026, banks may swap fresh three-to-five-year FCNR(B) deposits with the RBI at par, with the RBI absorbing the hedging cost of roughly 3.5% a year. By a further relaxation of 17 June, the rate ceilings on fresh three-to-five-year FCNR(B) and three-year-plus NRE deposits stand withdrawn. Both run to 30 September 2026, and the deposits are exempt from CRR and SLR. 

Direct impact: 

• NRIs can now earn 6 to 7%, with the highest near 7.1%, on dollar deposits with Indian banks, against around 5% earlier, and bear no exchange-rate risk on FCNR(B) balances, which are held and repaid in foreign currency. 
  
• The par swap and the CRR and SLR exemption together let banks fund competitively in dollars.  FCNR(B) inflows had fallen to USD 946 million in FY26 from USD 7.08 billion a year earlier. Estimates of fresh inflows under the scheme range from about USD 20 billion to USD 55 billion.

Gaps that remain:

• Banks have approached RBI to allow the existing FCNR depositors to rebook their FCNR in the new scheme however RBI is yet to come out with a circular on the same. If RBI allows re-bookings then that may impact the existing FCNR liabilities.
  
• Bankers expect nearly USD 1 billion of withdrawals if RBI does not permit rebooking of deposits placed over the last three years. Putting the USD 1 billion figure in context: Outstanding FCNR(B) deposits were approximately USD 33.8 billion as of March 2026. Banks are also expecting gross FCNR mobilization of USD 40–50 billion under the new scheme. So there could be implied 3% redemption of outstanding FCNR deposits
• RBI's objective is to attract new foreign currency inflows and not to provide higher interest rates to existing deposits. It will be interesting to see how RBI tackles this!

Outlook

The reforms arrived at the trough of the currency episode, which has since turned, largely on the external cycle.

The question now is whether the reforms convert into durable inflows once that cyclical tailwind fades. Three markers will indicate the answer:

• On debt: Whether the prescribed claim format is notified in a timely manner, enabling custodians to operationalise the withholding tax exemption, and whether the initial increase in FAR investments translates into sustained foreign debt inflows.
  
• On deposits: Whether the enhanced FCNR(B) deposit framework is extended beyond 30 September or allowed to lapse, which will indicate whether the measure is intended as a temporary response to currency pressures or as a long-term initiative to diversify India's foreign currency funding base.
• On equity: Whether a streamlined onboarding and KYC framework for non-resident foreign individuals is established, as expanded investment access alone is unlikely to translate into meaningful participation without efficient implementation.