Indian government bonds gained on Thursday after reports suggested New Delhi may scrap the 12.5% capital gains tax on overseas investors and the 20% withholding tax on interest earned from government securities. This move aims to attract more foreign capital and strengthen the rupee.
The benchmark 6.48% 2035 bond yield slipped by 3 basis points to 7.99%, reflecting optimism in the market. Analysts believe such tax relief could make Indian debt more appealing, especially ahead of Bloomberg’s review for inclusion in its Global Aggregate Index.
However, investors remain cautious. Inflation risks are rising after state-run fuel retailers increased prices in May, pushing April’s inflation of 3.5% higher. Crude oil prices have surged 35% since February due to the Iran conflict, adding pressure on India, which imports nearly 90% of its oil needs.
The rupee has touched record lows, while the 10-year bond yield has climbed nearly 35 basis points in recent months. Traders say the RBI may consider a rate hike to preserve India’s yield advantage over U.S. Treasuries and attract foreign inflows. Even a 25-basis-point increase is unlikely to push the 10-year yield beyond 7.15%.
Globally, a ceasefire between Israel and Lebanon has eased oil prices and U.S. Treasury yields, offering some relief. Still, the RBI’s decision remains the key factor for bond investors.