India has announced a new $13.3 billion fund under the India Semiconductor Mission 2.0 (ISM 2.0), aiming to build a comprehensive semiconductor ecosystem. This initiative follows the original ISM launched in 2021, which allocated $10 billion for greenfield semiconductor investments. Under ISM 2.0, chip design firms will receive grants and equity investment, while manufacturers of semiconductor materials and equipment are eligible for a flat 30% incentive. Despite these efforts, Commerzbank economists note that the near-term growth impact is likely to be limited, as only three of the twelve approved manufacturing projects under ISM 1.0 are currently operational, with several others not expected to be completed until 2029 [1].
In the foreign exchange market, the USD/INR pair rose 0.1% to 96.26 yesterday and has been trending higher since late June, attributed to rising global crude oil prices. The Reserve Bank of India (RBI) has reportedly encouraged major banks to attract more dollar deposits, echoing Finance Minister Nirmala Sitharaman’s recent call. Banks have mobilized around $10 billion in deposits so far, with inflows potentially reaching $30 billion by September 30. However, this initiative has drawn regulatory scrutiny from the Central Bank of the UAE [1].
Meanwhile, foreign investors have shifted their focus from Indian equities to bonds. So far in 2026, foreign investors have purchased $7.7 billion in Indian debt, surpassing the $6.6 billion inflow for all of 2025. In contrast, they have sold $27.6 billion in equities this year. The shift is partly driven by India's recent removal of the 12.5% long-term capital gains tax and the 20% withholding tax on interest income for foreign investors in government bonds, which led to $5.8 billion in bond inflows in June alone. India’s inclusion in the Bloomberg Global Aggregate Bond Index, expected in early 2027, could result in total inflows of $25 to $27 billion by 2028, with a potential index weightage of about 0.7% [2].
India has also expanded the 'fully accessible route' (FAR) for government securities, now including maturities of 15, 30, and 40 years, attracting $2.3 billion in monthly foreign inflows in June—the highest in 14 months. HSBC analysts suggest that the inclusion of longer-tenor bonds could attract foreign insurance and pension funds. Experts, including Tanveer Sethi of Kotak Mahindra Asset Management Singapore, describe the tax exemption as a 'gamechanger,' and anticipate that index inclusion will shift holdings from tactical to passive investors [2].
Despite these positive developments for the bond market and the rupee, equity outflows and a rising import bill due to higher global oil prices have pressured government finances and the rupee, widening India's balance of payments deficit [2].
CONCLUSION
India’s $13.3 billion semiconductor initiative and recent bond market reforms have attracted significant foreign investment into government debt, even as equities face heavy outflows. While the semiconductor push is expected to have limited near-term impact, the bond market is poised for further inflows ahead of India’s inclusion in the Bloomberg Global Aggregate Bond Index. The overall market sentiment is cautiously positive for Indian bonds and the rupee, but challenges remain for equities and the broader economy.