Foreign portfolio investors (FPIs) are pushing for faster remittance processes in India following the government's introduction of tax exemptions on certain bonds, urging regulators and banks to speed up money transfers between their overseas accounts and Indian markets.

The request centers on enabling funds from government securities transactions to be moved out of India — or redeployed — the next day rather than being held up in slower settlement cycles. Investors argue that streamlining remittance operations would reduce settlement delays and improve overall efficiency for foreign participants in the Indian bond market.

The backdrop to the demand is a change in tax treatment: the exemption abolishes withholding taxes on both interest income and capital gains from these bond investments. Previously, withholding tax requirements on interest earned by FPIs on government securities added procedural steps that could delay the repatriation of funds, since taxes had to be accounted for before money could be remitted abroad. Removing this obligation eliminates a key operational hurdle, and investors now want the plumbing of the market — the remittance and settlement mechanics handled by banks and regulators — to catch up with the improved tax regime.

FPIs invest in Indian government securities through dedicated routes, including the Fully Accessible Route (FAR), which was introduced by the Reserve Bank of India (RBI) in 2020 to allow unlimited foreign investment in specified government bonds. Foreign participation in Indian debt has grown steadily as the country's bonds were included in major global indices — JP Morgan began adding Indian government bonds to its emerging-market index in June 2024, with other index providers following — deepening the market's appeal to overseas funds. As index-linked inflows tied foreign holdings to benchmark weights, operational friction in moving capital has become more costly for funds that need to adjust positions quickly.

Industry participants say faster movement of funds would bring India's debt market practices closer to global standards, where large institutional investors expect rapid settlement and repatriation of capital. They have accordingly approached the relevant regulators and banking channels to seek improvements in transfer timelines. Whether the RBI and the banking system respond with revised remittance timelines is the key thing to watch, as any change would require coordination between the central bank, banks handling FPI accounts, and market infrastructure.

The push reflects a broader effort to make India's bond market more efficient for foreign portfolio investors now that the tax-related friction — often described as a "tax tangle" — has been removed.

Source: Economic Times Markets