Foreign investment outflow in india stock market

Foreign Investors Pull ₹10,000 Crore from Indian Stock Market Following Budget Announcement: In-Depth Analysis

Foreign portfolio investors (FPIs) have withdrawn nearly ₹10,710 crore from the Indian stock market over three days following the Union Budget announcement. This sell-off is primarily due to the government’s decision to increase taxes on derivatives trades and capital gains from equity investments.

Let’s break down the details:

Detailed Explanation

Key Events:

1. FPI Activity:

1. • July 23: FPIs sold equities worth ₹2,975 crore.
   • July 24: FPIs sold equities worth ₹5,130 crore.
   • July 25: FPIs sold equities worth ₹2,605 crore.
   • Total: ₹10,710 crore in three days.

2. DII Activity:

1. • Domestic institutional investors (DIIs) purchased stocks worth approximately ₹6,900 crore since July 23, indicating contrasting investment strategies between FPIs and DIIs.

Pre-Budget FPI Behavior:

• Ahead of the Budget, FPIs were net buyers, investing around ₹18,000 crore between July 12 and 22. This was driven by expectations of reform measures that would positively impact the market.

Budget Announcements Impacting FPIs:

1. Capital Gains Tax:
   • The Budget proposed a uniform tax rate of 12.5% on long-term capital gains (LTCG) for all assets, affecting both residents and non-residents.
   • For FPIs, the tax rate for LTCG on listed securities increased from 10% to 12.5%.
   • Short-term capital gains (STCG) tax rate for FPIs increased from 15% to 20%.

Market Reactions and Expert Opinions:

• Nishith Desai Associates Report:

• • The report highlights that while simplifying the capital gains tax regime is beneficial in some respects, the increased tax rates negatively impact non-resident investors and FPIs.

• VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services:

• • He emphasized the erratic nature of FPI flows compared to the steady growth of DII investments. DIIs have been consistent buyers throughout the year, while FPIs have alternated between buying and selling.

Positives Amidst the Sell-Off

1. DII Support:
   • The consistent buying by DIIs reflects strong domestic investor confidence and support for the market.
2. Long-Term Reform Benefits:
   • Despite the immediate negative impact on FPIs, the simplification of the capital gains tax regime could attract more stable and long-term investments in the future.
3. Market Stability:
   • The erratic nature of FPI flows balanced by steady DII investments suggests a stabilizing influence of domestic investors on the market.

Benefits

1. Enhanced Revenue for Government:
   • The increased tax rates on derivatives trades and capital gains will result in higher revenue for the government, which can be used for developmental projects and welfare schemes.
2. Simplification of Tax Regime:
   • The uniform tax rate of 12.5% on long-term capital gains simplifies the tax regime, making it easier for investors to understand and comply with tax regulations.
3. Promotion of Long-Term Investments:
   • The higher taxes on short-term capital gains might encourage investors to hold their investments for a longer period, promoting stability in the stock market.
4. Strengthened Domestic Investment:
   • The consistent and growing investment by DIIs indicates a robust domestic market, which can cushion the impact of volatile foreign investments.

Conclusion

The significant withdrawal by FPIs post-Budget reflects concerns over increased taxes on derivatives and capital gains. However, the consistent buying by DIIs demonstrates strong domestic market support. While the tax changes have caused short-term volatility, the long-term benefits of a simplified tax regime could lead to a more stable and attractive investment environment.

FAQs

1. Why did FPIs withdraw ₹10,000 crore after the Budget?

• FPIs withdrew due to increased taxes on derivatives trades and capital gains, particularly the hike in LTCG and STCG tax rates.

2. How much did DIIs invest during the same period?

• DIIs bought stocks worth approximately ₹6,900 crore since July 23, reflecting their confidence in the market.

3. What changes were made to the capital gains tax in the Budget?

• The Budget proposed a 12.5% tax on LTCG for all assets and increased the tax rates for FPIs: LTCG from 10% to 12.5% and STCG from 15% to 20%.

4. What are the long-term implications of these tax changes?

• While the immediate impact has been negative, the simplification of the tax regime could attract more stable and long-term investments in the future.

5. How do FPI and DII investment behaviors differ?

• FPI investments tend to be more erratic, alternating between buying and selling, whereas DIIs show steady growth and consistent buying patterns.

Foreign investment outflow in india stock market

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