Foreign portfolio investors (FPIs) have withdrawn nearly ₹10,710 crore from the Indian stock market in the three days following the Union Budget announcement. This significant outflow has been attributed to the government’s decision to raise taxes on derivatives trades and capital gains from equity investments. According to stock exchange data, FPIs sold equities worth ₹2,975 crore on July 23, another ₹5,130 crore on July 24, and ₹2,605 crore on July 25. In contrast, domestic institutional investors (DIIs) purchased stocks worth approximately ₹6,900 crore during the same period.
Ahead of the Budget, FPIs had been active buyers, acquiring equities worth around ₹18,000 crore between July 12 and 22 in anticipation of reform measures. The Budget presented by Finance Minister Nirmala Sitharaman introduced significant changes to the capital gains tax structure. “The rate of tax on long-term capital gains (LTCG) is proposed to be made 12.5 percent for all types of assets, irrespective of the transferor being a resident or a non-resident,” the announcement stated.
A report from Nishith Desai Associates elaborated on the impact of these changes: “While this simplification of the capital gains regime is a welcome move, and in some cases, the rates have decreased, the non-resident investors will suffer from a higher rate of LTCG tax across all types of assets. Even for FPIs, the tax rate for listed securities has been increased from 10 percent to 12.5 percent in the case of LTCG and 15 percent to 20 percent in the case of STCG.”
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, commented on the market dynamics, noting, “The most significant feature of institutional equity flows into the Indian market is the erratic nature of FPI flows and the steady growth nature of DII flows. DIIs have been sustained buyers in all months of CY 24, whereas FPIs alternated between buying and selling.”
The recent Union Budget introduced changes that caused a notable withdrawal of foreign investments from the Indian stock market. While domestic investors have stepped in to fill the gap, the increased taxes on capital gains and derivatives have raised concerns among foreign investors. As the market adjusts to these new regulations, it will be crucial for investors to stay informed and strategic in their investment decisions.
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