Rupee recovery needs tax reforms and more foreign capital: SBI Research
SBI Research suggests abolishing LTCG tax and clarifying ECB rules to attract foreign capital and stabilize the Rupee.
The Indian Rupee requires more than just central bank intervention to find stability. According to a recent report by SBI Research, long-term structural changes—specifically regarding tax reforms and capital inflow management—are essential to bolster the currency and attract sustained foreign investment.
Moving Beyond RBI Interventions
While the Reserve Bank of India (RBI) has actively deployed tools to support the Rupee, SBI Research argues that these measures have inherent limits. The report highlights that while the central bank can manage immediate volatility, the underlying strength of the currency depends on the government's ability to anchor "hot money" and encourage long-term equity participation.
To achieve this, the research firm has proposed several critical shifts in fiscal policy:
- Abolishing Long-Term Capital Gains (LTCG) Tax: Removing the tax on equity could significantly incentivize investors.
- Extending Holding Periods: Encouraging a holding period of two to three years to shift focus from speculative trading to long-term equity investment.
- Clarifying ECB Taxation: Providing much-needed clarity on withholding taxes for External Commercial Borrowings (ECBs), which currently fluctuate between 5% and 20%.
Addressing Massive Capital Outflows
The urgency for these reforms is underscored by staggering data regarding foreign investor behavior. The report notes that Foreign Portfolio Investors (FPIs) have withdrawn a massive Rs 3.51 lakh crore from the equity segment between 2021 and September 2026. The trend appears to be accelerating, with outflows exceeding Rs 2.61 lakh crore in 2026 alone, and an estimated USD 13 billion in equity outflows projected for FY27.
"Long term structural measures by Government is a sine qua non for a pick up in capital inflows as RBI can only do till a limit," the report emphasized.
Streamlining Export Proceeds and Forex Rules
Beyond equity markets, SBI Research suggested that the management of export earnings needs tightening to ensure liquidity. The report recommended that exporters bring their earnings back to India within a six-month window, while allowing for extensions in legitimate business cases. This move aims to prevent unnecessary delays in repatriating foreign exchange into the domestic economy.
External Pressures and Economic Outlook
The need for stronger capital inflows is further compounded by rising global pressures. The report forecasts a potential surge in Brent crude prices, estimating they could rise from approximately USD 103.4 per barrel to USD 110 over a short ten-day trading window. Additionally, India's balance of payments surplus is expected to narrow to around USD 55-60 billion in FY27.
Currently, the RBI is utilizing various mechanisms to defend the Rupee, including:
- A direct dollar-supply window for three state-run oil marketing companies.
- Raising the daily Cash Reserve Ratio (CRR) maintenance requirement for banks from 90% to 99%.
- Open market sales of government securities worth Rs 25,000 crore.
- Implementing caps on currency derivative positions and restrictions on rebooking cancelled forward contracts.
While these actions are expected to shift roughly USD 10-12 billion per month away from the open spot market, SBI Research maintains that only deep-rooted tax and regulatory reforms can provide the permanent stability the Rupee requires.