International investors withdraw funds worth over $1 billion from Indian markets post Budget announcements
The Union Budget unveiled last week brought about some key changes impacting capital gains taxation that appears to have spooked foreign portfolio investors (FPIs). According to data from the two leading stock exchanges, FPIs sold off equity holdings worth around $1.27 billion or Rs 10,710 crore in the three trading sessions following the Budget.
On the day of the Budget, July 23rd, FPIs offloaded stocks worth Rs 2,975 crore. Heavy selling continued the next day as well with them withdrawing another Rs 5,130 crore from domestic markets. On Thursday, July 25th, FPI selling amounted to Rs 2,605 crore. In contrast, domestic institutional investors such as mutual funds have been net buyers, mopping up equities valued at approximately Rs 6,900 crore over the past few days, helping contain volatility in the key stock indices.
Anticipating announcements around reforms and incentives, FPIs had been net buyers of Indian shares over the two weeks prior to the Budget, investing nearly Rs 18,000 crore. However, certain proposals around capital gains tax seem to have disappointed foreign investors. The Budget has proposed levying a uniform long-term capital gains tax of 12.5% on the transfer of all assets, regardless of the investor being resident or non-resident in India. Further, tax rates have been hiked on short-term capital gains and derivatives trading by FPIs.
While market experts feel the simplification of capital gains slabs is a welcome step, the higher tax incidence on non-residents could deter more foreign capital inflows going forward. Domestic institutional participation continues to remain strong, supported by steady inflows into mutual funds and pension schemes over the past year. Their stable buying patterns have helped stabilize domestic market sentiments amidst bouts of FPI volatility driven largely by global uncertainties and valuations overseas. Overall, market movements will continue tracking both domestic and international trends as well as quarterly corporate earnings reports.
