FII Return to Indian Markets: Tax Relief Alone Won't Bring Back Big Money
Analyst Ambareesh Baliga explains why rupee stability and West Asia peace are crucial for Foreign Institutional Investors to return to India.
The return of Foreign Institutional Investors (FIIs) to Indian equities is not as simple as adjusting a tax slab. While potential relief in Long-Term Capital Gains (LTCG) tax could spark interest, market analyst Ambareesh Baliga suggests that a sustained comeback depends on a more complex cocktail of currency stability and global peace.
Beyond the Tax Break: The Rupee and West Asia Factor
In an exclusive conversation with ANI, Ambareesh Baliga highlighted that foreign investors are currently grappling with a double blow: capital gains taxation and the depreciation of the Indian rupee. While removing or reducing the LTCG tax would certainly boost sentiment, it may not be the sole trigger for a massive inflow of funds.
Baliga emphasized that the geopolitical turmoil in West Asia remains a critical hurdle. The conflict in the region directly impacts crude oil prices, which in turn puts immense pressure on the Indian rupee. A resolution to the West Asia crisis could lead to lower oil prices, helping the rupee stabilize—a vital requirement for overseas investors who calculate their total returns based on currency fluctuations.
"If these things fall in place, I think you'll have the foreign investors coming back. But right now it's very difficult to say whether this is the beginning of the new comeback of FIIs or whether that would happen in 2027," Baliga noted.
The Double Taxation Dilemma
Apart from LTCG, Baliga raised a significant concern regarding dividend taxation. He argued that since dividends are distributed from income that has already been taxed, taxing them again amounts to double taxation. Addressing both the LTCG and dividend tax structures could significantly improve the outlook for both domestic and foreign investors.
Understanding the LTCG Journey in India
To provide context on the tax landscape, the Long-Term Capital Gains tax applies to profits from assets held for more than 12 months. The history of this tax has seen several shifts:
- 2004: Tax on listed equity shares was abolished to encourage investment, replaced by the Securities Transaction Tax (STT).
- 2018: The government reintroduced LTCG tax at a rate of 10 per cent under Section 112A.
- 2024: The rate was revised to 12.5 per cent for gains exceeding an annual exemption limit of Rs 1.25 lakh.
Market Resilience Amidst Record Selling
Despite months of heavy selling by foreign investors, the Indian market has shown surprising strength. Baliga pointed out that the market's depth has allowed it to absorb large outflows over the last two years without collapsing. This resilience is partly attributed to India's strong economic growth prospects, which ensure it remains a key destination for global capital.
Furthermore, a recent recovery in domestic equities has been fueled by corporate earnings in the second quarter, many of which exceeded market expectations. This, combined with cautious hopes for a de-escalation in West Asia, has provided some support to the indices.
Is the Bottom In?
While there have been a few sessions of foreign buying recently, Baliga cautioned investors against premature celebrations. He warned that a few days of inflows do not necessarily confirm a sustained trend. According to him, it is too early to conclude that the markets have bottomed out, and the next few weeks will be crucial in determining the trajectory of the Indian equity market.