Foreign Portfolio Investors (FPIs) have significantly reduced their exposure to the Indian stock market, withdrawing nearly ₹10,710 crore over a three-day period following the Union Budget announcement. The substantial outflow began after the government unveiled new tax measures affecting derivatives trades and capital gains from equity investments.
- Withdrawal Details: Data from the stock exchanges reveals that FPIs sold equities worth ₹2,975 crore on July 23, ₹5,130 crore on July 24, and ₹2,605 crore on July 25. This sharp withdrawal follows the introduction of higher tax rates on capital gains and derivatives.
- Impact of Budget Measures: The recent Union Budget, delivered by Finance Minister Nirmala Sitharaman, introduced increased taxes on capital gains. Specifically, the long-term capital gains (LTCG) tax rate was raised to 12.5% for all types of assets, including listed securities. Short-term capital gains (STCG) tax rates were also increased from 15% to 20%. These changes are set to impact both resident and non-resident investors, with foreign investors facing a more significant tax burden.
- Domestic Investor Activity: In contrast to the foreign sell-off, domestic institutional investors (DIIs) have been active buyers, purchasing stocks worth approximately ₹6,900 crore from July 23 to July 25. This divergence highlights a shift in market dynamics as domestic investors capitalize on the opportunity presented by the FPI exit.
- Pre-Budget FPI Investment: Prior to the Budget announcement, FPIs had been optimistic, investing around ₹18,000 crore in Indian equities between July 12 and July 22. Their expectations for reform measures were high, but the new tax policies have prompted a re-evaluation of their investment strategy.
- Industry Reactions: According to a report from Nishith Desai Associates, while the simplification of the capital gains tax regime was initially seen as positive, the increased tax rates for non-resident investors and FPIs have dampened market sentiment. The higher LTCG tax rates are particularly impactful, altering the cost-benefit analysis for foreign investments.
- Future Outlook: The substantial FPI withdrawals raise questions about future investment flows and market stability. Analysts and investors will be closely monitoring how the new tax rates affect market liquidity and investor confidence in the coming months.
I am Aparna Sahu
Investment Specialist and Financial Writer
With 2 years of experience in the financial sector, Aparna brings a wealth of knowledge and insight to Investor Welcome. As an accomplished author and investment specialist, Aparna has a passion for demystifying complex financial concepts and empowering investors with actionable strategies. She has been featured in relevant publications, if any, and is dedicated to providing clear, evidence-based analysis that helps clients make informed investment decisions. Aparna holds a relevant degree or certification and is committed to staying ahead of market trends to deliver the most up-to-date advice.
