FPI Inflows Surge to $3 Billion After Tax Cuts; SBI Expects Big Leap to Narrow Credit Gap

FPI Inflows Surge to $3 Billion After Tax Cuts; SBI Expects Big Leap to Narrow Credit Gap​

A significant tailwind for India's financial markets has emerged following crucial tax changes concerning Government Securities (G-Secs). According to Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India (SBI), the market has seen strong initial foreign capital interest. FPI inflows have been estimated at around $3 billion in the first two weeks subsequent to the government's actions.

The institutional focus is now on mobilizing substantially more funds through these routes. SBI expects that foreign investors could bring between $50 and $65 billion into the system via these mechanisms alone. These increased deposits are viewed as highly beneficial for strengthening India's domestic banking structure.

Tax Reforms and RBI Support Fuel Foreign Capital Interest​

The government intervened on June 5 by granting significant tax concessions to FPIs. The changes exempt foreign investors from capital gains taxes, both short-term and long-term, earned from the sale or transfer of G-Secs. Furthermore, the withholding tax on interest income from these investments was also removed.

Beyond the direct taxation relief, the Reserve Bank of India (RBI) has been actively supporting banks to draw in foreign currency deposits. The central bank extended support for hedging costs on FCNR(B) deposits and introduced a concessional forex swap window for public-sector external commercial borrowings (ECBs). These measures are designed to encourage both NRIs and institutional investors to mobilize foreign capital into the country.

Bridging the Credit Deposit Growth Gap​

The influx of stable, large-scale deposits is viewed as crucial for addressing a persistent imbalance within the Indian banking system. Currently, there is a noticeable lag between the growth rate of credit provision and deposit mobilization across banks.

As at May-end 2026, scheduled banks registered a credit growth rate of 17.44 per cent. This outpaced the deposit growth rate of 12.14 per cent by 530 basis points. The SBI economist noted that achieving a deposit growth rate of around 15 percent would serve a great purpose for the banking sector.

If the anticipated amount of $60 billion is achieved through these channels, it could inject approximately $5.5 trillion into the economy. This substantial funding boost could push the overall deposit rate significantly higher, thereby narrowing the existing gap between credit and deposit growth rates.

Global Economic Concerns Temper Optimism​

Despite domestic strength driven by tax changes, the global economic outlook remains cautious. Ghosh indicated that the international economy may not be performing optimally in certain sectors. He pointed to considerable adjustments within the US technology sector as a key area of concern.

Concerns around AI valuations are evident across major global markets. The stability and performance of commodities also suggest underlying global weakness. Precious metal prices, for instance, have been declining significantly despite a decline in crude oil prices due to dollar strengthening. This phenomenon is seen by experts as an indication that capital flows might be reorienting back toward India after previous outflows.