The Indian stock market has been experiencing significant volatility in recent months, primarily driven by two major factors: the increase in Long-Term Capital Gains (LTCG) Tax on Foreign Institutional Investors (FIIs) and the depreciation of the Indian Rupee against the US Dollar. In this article, we will analyze how these developments have impacted the market, why FIIs have reacted strongly, and what the latest statements from SEBI indicate about future trends.
Market Overview: The Recent Downfall
The Indian stock market has witnessed a notable decline from its 52-week high of 26,277.35 to its current levels of around 23,300. This sharp correction of approximately 7% has raised concerns among investors. The major fall started after February 1st, coinciding with the Union Budget announcement, which provided clarity on taxation policies affecting FIIs.
Key Reasons for Market Decline
1. Increase in LTCG Tax for FIIs
Earlier, the Long-Term Capital Gains (LTCG) tax for FIIs was 10%.However, the government announced an increase to 12.5%, effective from April 1, 2026.This move led to panic selling among FIIs, as higher taxation reduces their net returns.
2. Depreciation of the Indian Rupee
The weakening of the Indian Rupee against the US Dollar further added to FIIs' concerns.A depreciating rupee reduces the overall returns for foreign investors when they convert their profits back to dollars.
These two factors created a double impact on FIIs, leading to aggressive selling, which pushed the Indian stock market downward.
Why FIIs Are Unhappy with the Tax Hike?
The tax hike has been heavily criticized by market experts and global fund managers. Prominent investor Sameer Arora raised concerns, stating that:
“Out of 200 countries worldwide, 199 do not impose capital gains tax on FIIs, except for India.”
This statement highlights the unique taxation burden faced by foreign investors in India. Since FIIs play a crucial role in providing liquidity and stability to the Indian stock market, any policy that discourages their participation can have long-term negative implications.
Major Concerns Raised by FIIs:
- Lower Net Returns – Increased tax directly reduces their profits.
- Capital Outflows – Many FIIs may choose alternative markets with zero capital gains tax, such as the US, UK, or Singapore.
- Market Competitiveness – The Indian stock market may become less attractive compared to other emerging markets.
Recent Statement by SEBI Chief: No Tax Reduction for FIIs
With increasing pressure from the investment community, many hoped that the government or regulatory bodies might reconsider the tax hike. However, SEBI Chief Tuheen Kanta Pandey recently stated:
“No need to alter the FPI tax law. FIIs must accept the existing tax structure.”
This statement indicates that:
1. There will be no reduction in LTCG tax for FIIs.
2. The government is unlikely to reconsider its decision in the near future.
3. FIIs will have to adjust to the new taxation system or look for alternatives.
This announcement came over the weekend, when the market was closed. Therefore, the upcoming trading sessions will reveal whether FIIs will continue their buying trend or return to aggressive selling.
How Has the Market Reacted?
Over the last week, despite the overall bearish trend, the market saw some FII buying activity. In the last five trading sessions:Three days witnessed net FII buying, leading to temporary market recovery.The strengthening of the Indian Rupee from 88 to 86 also provided some relief.
However, with SEBI’s latest stance, the question remains:
Will FIIs continue their buying spree, or will they resume selling pressure? The upcoming trading sessions will be crucial in determining the market’s short-term direction.
Will LTCG Tax Be Removed for Retail Investors?
Many retail investors misinterpret this tax debate and assume that if FIIs get tax relief, it will apply to them as well. However, this is not the case.The discussion revolves only around FIIs and FPIs (foreign investors).Retail investors will continue paying 12.5% LTCG tax with no exemptions in sight.
Thus, expecting a tax reduction for retail investors due to FII-related discussions is misleading.
The Indian stock market remains at a crucial turning point. The increased LTCG tax on FIIs, combined with rupee depreciation, has led to significant volatility. The recent SEBI statement has made it clear that FIIs should not expect any tax relief.
Key factors to watch in the coming weeks:
✅ Will FIIs continue their buying or return to selling?
✅ Will the Indian Rupee stabilize against the US Dollar?
✅ How will the government respond if market conditions worsen further?
Investors should stay updated with market developments and make informed decisions based on long-term trends rather than short-term fluctuations.
Disclaimer
The information provided in this article is for educational and informational purposes only and should not be considered as financial, investment, or tax advice. The content is based on publicly available information and personal analysis, which may not always reflect the most recent market developments.
