India Seeks Foreign Investment Amid US-Iran Tensions
In an effort to attract foreign investment amid the ongoing Middle East crisis, the Indian government plans to eliminate the capital gains tax on foreign portfolio investors’ holdings in government securities. This initiative aims to mitigate the economic impact of the conflict in Iran. Reports indicate that the Union Cabinet, led by Prime Minister Narendra Modi, has approved an ordinance to amend the Income Tax Act, which will facilitate this tax exemption once it receives presidential approval.
Currently, foreign investors face a 12.5% long-term capital gains tax on listed equities and bonds held for over a year. Additionally, interest income from government securities is subject to a 20% withholding tax. The government had previously removed a concessional tax rate of 5% for these investors in 2023.
Several steps to attract foreign capital
The government is expected to introduce further measures to enhance foreign capital inflows. According to a Bloomberg report, the Reserve Bank of India may classify select long-duration government securities under the Fully Accessible Route. This classification would allow overseas investors to purchase these bonds without ownership restrictions. The last update to this list occurred in 2024, when the central bank excluded certain long-term government bonds from the program.
Market participants have been advocating for a reduction in both the long-term capital gains tax and the withholding tax on interest income from government securities, particularly in light of ongoing foreign capital outflows. So far this year, net foreign portfolio investment outflows have reached Rs 2.47 lakh crore, significantly higher than the Rs 1.04 lakh crore withdrawn in 2025. The rupee has also faced pressure, hitting a record low of 96.965 against the dollar on May 20 before recovering slightly.
Rupee’s unprecedented fall
The rupee’s decline has prompted policymakers to take measures to curb further depreciation. Prime Minister Modi has called on citizens to conserve foreign exchange reserves in response to rising oil import costs. Factors contributing to the rupee’s weakness include US tariff measures, significant foreign investor withdrawals, and the oil price shock stemming from the Iran conflict.
After reaching a historic low of 96.9650 against the dollar, the rupee has seen some recovery, aided by increased intervention from the Reserve Bank of India and a decrease in oil prices due to renewed US-Iran diplomatic efforts. Despite this, the rupee remains the second weakest currency in Asia this year, having depreciated by over 6% against the dollar. On Wednesday, the currency closed at 95.71 per dollar, down 0.5% for the day, while the yield on the benchmark 10-year government bond rose by 1 basis point to 7.02%.
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