Axis Mutual Fund’s Devang Shah: ‘Forex measures, FII bond tax leeway could attract $60-80 billion’

Depending on how they are executed and the final guidelines, India could see inflows to the tune of $60 billion-$80 billion from the various measures announced by the government and the Reserve Bank of India (RBI) on Friday to attract foreign capital — from the scrapping of capital gains and withholding tax on foreign institutional investors’ (FIIs) investment in government debt to concessional windows to boost foreign currency deposits and loans — according to Devang Shah, Head of Fixed Income at Axis Mutual Fund. And while these steps appear adequate, there remains space to take more action, if needed.

“Issuance of foreign currency sovereign bonds could serve as a supplementary step to finance the fiscal deficit, ease pressure on domestic yields, and support foreign inflows,” Devang Shah told Siddharth Upasani in an interview. Edited excerpts:

What is your estimate of the foreign inflows that we can see from the measures announced by the government and the RBI?

There were two sets of measures. The government removed capital gains and withholding taxes on government bonds. This itself is a positive measure which would attract flows and is expected to serve as a precursor to government bonds being included in Bloomberg’s indices. If that materialises, it could potentially result in additional inflows of $20 billion-$25 billion.

Significant importance must also be attached to the second set of measures announced by the RBI such as the Foreign Currency Non-Resident (Bank) deposits, for which the entire hedging cost will be provided. In addition, there is the concessional forex swap facility for External Commercial Borrowings (ECBs) by Public Sector Undertakings (PSUs). While the final guidelines are awaited, it may be understood that the RBI would have received feedback from market participants for the same. If the concessional rates are sufficiently attractive, ECB borrowings by PSU lenders could become a significant avenue.

The combined impact of these two facilities could possibly bring in inflows of $50 billion-$55 billion, is our estimate.

Further, we believe that the removal of capital gains and withholding taxes is expected to deliver meaningful benefits over time. Yields in India have already increased notably, while the rupee has depreciated by over 15% in the past 18 months. At these levels, certain FIIs and hedge funds may find yields attractive. To summarise: $30 billion-$35 billion may come from FCNR(B) deposits, $10 billion-$20 billion from PSU ECBs, and $20 billion-$25 billion from the tax concessions and Bloomberg index inclusion.

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In aggregate, this could translate into inflows of $60 billion-$70 billion over the next 12-18 months.

Are the withholding and capital gains taxes the only reason why FII holdings in Indian government debt have been so low? Or does more need to be done?

Several measures have been announced, and their effectiveness will depend on how they are executed before any additional steps are considered. However, if these measures do not prove as attractive as anticipated for any reason, and if the West Asia crisis remains unresolved, some pressure may emerge on the fiscal front.

At present, even after the recent increases in petrol and diesel prices, the Centre could face a shortfall of Rs 2.5 lakh crore-Rs 3 lakh crore. This gap may widen further if crude oil prices rise beyond $100-$110 per barrel. In such a scenario, the government could consider issuing foreign currency sovereign bonds.

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While the measures announced so far appear adequate and could attract inflows in the range of $60 billion-$80 billion, depending on execution and final guidelines, there remains room for additional action if required. Issuance of foreign currency sovereign bonds could serve as a supplementary step to finance the fiscal deficit, ease pressure on domestic yields, and support foreign inflows.

Could there be a negative impact if the numbers fall short of expectations?

Even if the eventual inflows are lower than current estimates, this would still represent a positive step. The measures announced were not expected to be introduced all at once, but rather over a period of time, which underscores the decisiveness of both the government and the RBI. We believe that the measures were announced to acknowledge the underlying risk of a potential Balance of Payments (BoP) deficit. Based on the market estimates, the BoP gap for the year could be in the range of $50 billion-$75 billion, and the measures collectively aim to address this.

There is also limited concern around execution. A relevant precedent exists from 2013, when banks successfully mobilised approximately $26 billion through FCNR(B) deposits with effective efforts. In that context, achieving inflows of $30 billion-$40 billion under the current framework appears realistic.

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Do you expect FIIs to pour money into Indian debt immediately or wait for more cues on the interest rate front?

There are broadly two types of investors: those with a medium-term outlook and others with a more tactical approach to interest rates. From a macroeconomic standpoint, we believe that the RBI has attempted to prepare the market by highlighting elevated inflation risks and providing clear forward guidance. It has indicated that if inflation data deteriorates further, policy rate hikes remain a possibility.

Macroeconomic data will ultimately determine whether FIIs choose to take positions immediately or adopt a wait-and-watch approach. However, initial indications suggest healthy participation given that FII activity in the debt market on Friday was robust, with estimated inflows in the range of Rs 3,000 crore-Rs 4,000 crore based on changes in holdings. That being said, a segment of investors may prefer to wait for greater clarity on the interest rate cycle. It is important to note that rates in India have already moved up meaningfully. The 10-year term gov bond yield, which had bottomed at 6.15% in June 2025, had risen to around 7% prior to the latest announcements. Historically, in rate upcycles over the past decade, 10-year gov bond yields have not moved significantly beyond 7.5%. Long-term gov bond yields are already in the range of 7.6-7.65%, indicating that a substantial portion of the adjustment has already occurred.