Foreign portfolio investors (FPIs) have offloaded approximately 81.06 billion rupees ($968 million) in Indian equities due to the government’s budgetary changes, which increased taxes on derivatives trades and capital gains. Provisional data from the National Stock Exchange reveals that this massive sell-off occurred on Tuesday and Wednesday.
Prior to the budget announcement, FPIs had been bullish, purchasing a net $2.20 billion in Indian equities over six sessions. This investment spree had driven India’s benchmark indexes, Nifty 50 and Sensex, up by about 2%. However, a subsequent 1% drop in these indexes, partly due to a global cyber outage and the new tax implications, reversed the gains, with the indexes shedding about 1% since the budget.
The recent tax hike, which includes a modest increase in long-term capital gains tax to 12.5%, has sparked concerns among investors. Ashish Gupta, Chief Investment Officer at Axis Mutual Fund, noted that while the hike is relatively moderate, the uncertainty surrounding potential future increases adds pressure to the market. Sectors with significant FPI holdings, such as financial services and private banks, have seen declines of around 3%.
Despite the foreign sell-off, domestic institutional investors have countered the trend by investing a net $0.55 billion since the budget. However, the broader impact of the tax changes is evident beyond equities, with the rupee falling to record lows on budget day and the following day amid declining sentiment.
According to a top finance ministry official, the tax reforms aim to curb “excessive speculation” in the derivatives market and promote long-term investments. Meanwhile, India’s markets regulator reported a 300% surge in intraday traders from fiscal years 2019 to 2023, with seven out of ten traders incurring losses.
