Rising US bond yields are making India less attractive to foreign investors, while complex rules and paperwork are adding to the hurdles of investing in the country, Neelkanth Mishra, Executive Director-India at the World Bank, has told CNBC-TV18.
Mishra said cutting taxes alone may not bring foreign money back. India also needs to simplify investment procedures, clarify regulations and speed up decision-making.
He also argued that pressure on the rupee may be greater than India’s underlying external finances would suggest, partly because importers, exporters and investors are adjusting their currency positions amid uncertainty.
Why foreign investors are turning away from India
When US bond yields rise, investors have less reason to seek returns in emerging markets such as India. The gap between the returns available in the two countries becomes narrower, reducing India’s appeal.
Mishra illustrated this with an example. If US yields are 2% and Indian yields are 8%, India offers a clear return advantage. But if US yields rise to 5.3% and Indian yields stand at 7.3%, that advantage shrinks, making foreign investors less willing to put money into Indian markets.
“What is extraordinarily good for domestic borrowers and entrepreneurs starts to become a challenge for the external account,” Mishra said.
Lower borrowing costs can support Indian businesses, but they do not guarantee foreign investment. Overseas investors compare returns across markets, and India must compete with the US and other destinations for their money.
Why pressure on the rupee may be greater than expected
Mishra said currency-market pressure appears large relative to India’s underlying balance of payments position.
He cited an $18 billion balance of payments deficit in the second half of FY26, compared with $75 billion in Reserve Bank of India (RBI) intervention in the foreign exchange market over the period.
He estimated that currency-related positions could have reached around $100 billion. These include importers buying dollars early, exporters delaying the conversion of overseas earnings into rupees, and investors hedging against a weaker currency.
Such behaviour can intensify pressure on the rupee. Importers rush to buy dollars, while exporters hold back dollar supplies. The resulting imbalance can add to currency weakness even without a comparable deterioration in the country’s underlying finances.
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More than the tax and the impact it has on returns, I think the administrative overhead is the bigger issue.NEELKANTH MISHRA, EXECUTIVE DIRECTOR OF INDIA AT WORLD BANK
Mishra compared the dynamic to a bank run: even a fundamentally sound bank can face a crisis if everyone tries to withdraw money at once.
He said recent RBI measures were needed to address these pressures. Currency hedging costs had risen to 4.5%, making protection against exchange-rate movements expensive if the rupee remained stable.
A prolonged period of stability could encourage investors and businesses to unwind some of these positions, Mishra said, although he did not specify when that might happen.
Why tax cuts may not bring foreign money back
Calls to cut taxes on foreign portfolio investors (FPIs) may not address the main reasons behind the outflows, Mishra said.
If higher US yields make emerging markets less attractive, lower Indian taxes may not be enough to change investors’ decisions. He believes the paperwork and complexity involved in investing in India deserve greater attention.
“More than the tax and the impact it has on returns, I think the administrative overhead is the bigger issue,” Mishra said.
Foreign fund managers can use similar investment processes across countries, but investing in India may require additional paperwork and navigating complex procedures. Unclear rules can add to the cost and uncertainty.
Mishra called for simpler tax administration, clearer regulations, faster decisions and judicial reforms to make India easier to invest in. A more predictable system, he argued, could do more to improve India’s appeal than tax cuts alone.
What India needs to attract global capital
India also needs to improve its access to global investment flows, Mishra said. One step is the effort to include Indian bonds in global bond indices, which can make them easier for international investors to access.
The inclusion process is reviewed every six months. Work is also under way to build investor confidence in India’s bond-trading infrastructure.
Watch accompanying video for full conversation.
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Ultimately, India faces two challenges: competing with higher US returns and making its own markets easier to navigate. Domestic economic growth and lower borrowing costs may support businesses, but foreign investors also need clear rules, efficient processes and confidence that their investments can be managed without unnecessary hurdles.
Mishra’s message is that India cannot rely on tax changes alone to reverse foreign outflows. It must also make investing simpler and more predictable.