Foreign portfolio investors have been consistent sellers of Indian equities for much of the past year, and the resulting capital-account strain has kept the rupee under pressure. Herein, Jefferies argues that a reduction in the long-term capital gains tax on equities could meaningfully improve foreign investor sentiment and help stabilise portfolio flows.
The brokerage noted the substantial equity-related exits by foreign portfolio investors, foreign promoters and private equity funds. These outflows have contributed to the weakness in India’s capital account, leaving the currency more vulnerable at a time when global interest-rate differentials and competing investment destinations already make Indian markets less compelling for overseas capital.
Jefferies has identified three possible routes the government could take.
The first is an across-the-board cut in both long-term and short-term capital gains rates that would apply to all investors.
The second is a more targeted reduction specifically for foreign portfolio investors.