FII's will not come back to India

Budget expectation remains always high, and starting from allocation to different sectors, to relief in individual taxation through some new rules and regulations. But this time the focus and expectation are different. The focus is more on key factors like what will be the borrowings for the new financial year and how the fiscal deficit stands going ahead. Further every trader will have an eye on key announcements to get support for the trade war issues. Among all these piles of expectation,s the biggest one will be the LTG -long-term capital gain. This has impacted everyone in the country and out of the country.

Today, Foreign Institutional Investors (FIIs) hold less than 17% of Indian equities, an all-time low. Since the reintroduction of Long-Term Capital Gains (LTCG) tax and the revision of Short-Term Capital Gains (STCG) in 2018, FIIs have cumulatively sold over ₹10 lakh crore worth of Indian equities. On one side, we have reduced the dependency on FII’s inflow and have become more towards DII’s investments.  But the biggest question is, are we going to absorb more decline for FII’s holding in the Indian equity market? In simple terms,s are we ready for more sale off my FII’s?

The Ministry of Finance must understand that the capital market is not a revenue creation model but a wealth creation partner.  It cannot be compared to the consumption market, where GST makes a significant revenue for the government. The capital market needs different treatment to look towards its growth.

From an FII’s perspective, India today offers less than 5% net dollar returns, while dividends are effectively double-taxed—first at the corporate level and again at the investor level. In risk-adjusted terms, there is no longer a compelling incentive for foreign capital to remain invested.

Are we becoming more optimistic that the Mutual Fund industry's growing SIP book will attract more inflows and will set off against the FII’s exit? Well, those who are under this assumption, retail money is sticky only when the music is good and full of melody. We have seen previously that retail is more scared to invest and even the stop sip when the markets are low and they even redeem their holding in expectation of further sell-off by FII’s.

In 2008, FIIs sold roughly ₹1 lakh crore, and domestic institutions were too small to counterbalance them. The result was a nearly 60% collapse in the Sensex and Nifty.

Over the past 7–8 years, FIIs have sold nearly ten times that amount. The counterbalance was by DII’s but how long?

India trades at a premium to most emerging markets because it has earned a reputation for capital stability. If equity prices begin reacting violently to every US Fed move or global risk event, India will be reclassified. We all know that private capex has been a major missing part, and it’s only the government that is spending.  Earnings are coming very slowly compared to previous times.

 Even the domestic investors are scared to redeem their old holdings of mutual funds and equities since they must pay 12.5% tax as capital gain. This has created a huge problem for the rebalancing of portfolios.  We all know that without rebalancing, one cannot create wealth. No,w where certain mutual fund schemes are not performing and the client wants to exit those, they don’t have the guts to do the same since 12.5% tax needs to be paid. The same is applicable for stocks, particularly post September 2024, the way the market has fallen, investors are saddled with nonperforming stocks but can’t exit since they have to pay capital gain tax. As I said earlier, the capital market cannot be treated as a revenue model just like the consumption market.

On the other hand consumption story is a hoax since borrowings are going up and savings rates are coming down. If we face any slowdown, the whole ecosystem will get stuck, and NPA ratios will start climbing up. Household portfolios would be underwater, discretionary spending would slow, which would lead to GDP growth to deaccelerate which will finally transform into a further fall of the equity market. LTG plays a pivotal role for the Indian economy and globally too.  If we are unable to make it attractive, some other country will make it more lucrative to attract FII’s inflow. Indians still have an exemption limit of 1.25 lakhs, whereas FII’s don’t have anything as such. Tell me why FII’s will invest in India?