The Longest Losing Streak in Decades
India’s stock market is experiencing a prolonged downturn, marking its longest losing streak in nearly three decades and wiping out significant investor wealth. A combination of weak corporate earnings, persistent foreign outflows, and uncertainty over U.S. tariffs has fueled this decline. Additionally, government policies and regulatory changes have played a critical role in shaping investor sentiment and market performance.
Taxation and Regulatory Challenges Impacting Investor Confidence
Recent government policies, including the increase in Long-Term Capital Gains (LTCG) tax, Goods and Services Tax (GST), and Securities Transaction Tax (STT), have raised concerns among investors. While these measures aim to enhance government revenues, they have added complexity and costs to financial transactions, thereby reducing post-tax returns for investors. Critics argue that the timing and magnitude of these changes have been counterproductive, leading to capital outflows and increased market volatility.
Foreign Investors Pull Out Billions from Indian Equities
Foreign Institutional Investors (FIIs), who have been key drivers of liquidity and growth in India’s stock market, have been aggressively withdrawing funds. Since October 2024, FIIs have pulled out approximately ₹3 lakh crore from Indian equities, triggering sharp corrections in major indices.
The primary reasons for this exodus include:
✔ Concerns over India’s economic slowdown
✔ Weak corporate earnings
✔ More attractive investment opportunities in other emerging markets like China
Rupee Depreciation Further Dampens FII Interest
The depreciation of the Indian rupee against the U.S. dollar has worsened the investment climate. In 2024, the INR depreciated for the seventh consecutive year, closing at ₹85.61 per U.S. dollar, a 2.8% decline.
For FIIs, currency depreciation erodes the value of their investments when converted back to their home currency. This makes Indian equities less attractive, especially when combined with higher taxes.
For instance, if an FII invests ₹100 crore in Indian equities and earns a 10% return, the gain would be ₹10 crore. With an LTCG tax rate of 12.5%, the tax liability is ₹1.25 crore, leaving a net gain of ₹8.75 crore. However, if the rupee depreciates by 5%, the value of the investment in dollar terms decreases, further reducing returns. This dual impact of taxation and currency depreciation makes India a less appealing market for foreign investors.
Criticism of Government’s Fiscal Approach
The Finance Ministry’s aggressive tax policies and regulatory tightening have faced backlash from market experts. Critics argue that while ensuring revenue growth and market stability is essential, the timing and intensity of these measures have backfired, causing an outflow of capital.
In an era where global investors are highly sensitive to returns and risks, such policy decisions could act as deterrents to foreign investment, further fueling market instability.
The Road Ahead: Restoring Investor Confidence
The current market downturn highlights the need for a strategic reassessment of fiscal policies and their impact on investor sentiment. To restore confidence, policymakers must:
✔ Find a balance between taxation and market incentives
✔ Ensure regulatory clarity and stability
✔ Create a conducive environment for domestic and foreign investments
While taxation and regulation are crucial for a strong financial system, their execution needs to be well-calibrated to avoid discouraging investments. As India navigates these economic headwinds, a more balanced fiscal approach will be essential to maintain market stability and long-term investor confidence.
