Foreign portfolio investors (FPIs) have pulled out nearly $1.27 billion (approximately Rs 10,710 crore) from the Indian stock market in the three days following the government’s announcement of increased taxes on derivatives trades and capital gains from equity investments in the Union Budget.
Significant Outflows Following Budget Announcement
According to stock exchange data, Foreign portfolio investors sold equities worth Rs 2,975 crore on July 23, the day the Budget was announced, followed by an additional Rs 5,130 crore on July 24. They further withdrew Rs 2,605 crore on Thursday, bringing the total outflow to nearly $1.27 billion. In contrast, domestic institutional investors (DIIs) have purchased stocks worth around Rs 6,900 crore since July 23, providing some support to the market. As a result, the Sensex experienced a modest decline of 463 points, settling at 80,039.80 after the Budget presentation.
FPIs had been optimistic in the run-up to the Budget, purchasing equities worth around Rs 18,000 crore between July 12 and 22, anticipating significant reform measures. However, the Budget’s announcement of tax increases on long-term capital gains (LTCG) and short-term capital gains (STCG) led to a swift reversal of this trend.
Foreign Portfolio Investors Impact of Tax Reforms on Investor Sentiment
The Union Budget introduced a major overhaul of the capital gains tax regime, proposing a uniform LTCG tax rate of 12.5 percent for all asset types, applicable to both residents and non-residents. While this simplification was generally welcomed, non-resident investors, including FPIs, now face higher LTCG tax rates. Specifically, the tax rate for listed securities has increased from 10 percent to 12.5 percent for LTCG and from 15 percent to 20 percent for STCG. Additionally, the increase in Securities Transaction Tax (STT) rates on Futures and Options will raise trading costs.
Manoj Purohit, Partner & Leader, Financial Services Tax, Tax & Regulatory Services at BDO India, noted that non-resident investors benefiting from tax treaties will be shielded from the additional tax burden. However, FPIs view the higher capital gains tax as a negative development, even though the increase in long-term gains is moderate.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, highlighted the erratic nature of FPI flows compared to the steady growth of DII flows. FPIs were net sellers in January, April, and May, cumulatively selling Rs 60,000 crore, while they were net buyers in February, March, and June, with cumulative purchases of Rs 63,200 crore. This divergence is attributed to FPIs being influenced by external factors such as US bond yields and valuations in other markets, whereas DII activity is primarily driven by domestic market flows.
Despite the recent outflows, DIIs’ sustained buying and inflows into mutual funds are expected to keep the markets resilient. Vijayakumar also pointed out that better-than-expected earnings from major IT companies could attract FPI interest, as valuations in this sector are not excessively high.
In summary, while the recent tax changes have led to significant FPI outflows, the steady support from DIIs and potential opportunities in specific sectors may help stabilize the Indian stock market in the near term. The impact of global factors on FPI activity, however, remains a key variable to watch.
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