Hello, this is Priyanka Salve, writing to you from Singapore.
Welcome to the latest edition of "Inside India" — your one-stop destination for stories and developments from the world's fastest-growing large economy.
Once a favorite emerging market for foreign investors, Indian equities have been losing their charm. Foreign holdings of Indian stocks are currently at an all-time low of 14%. Now a tax cut, which puts India on par with several Asian markets, is being proposed to win back these investors.
This week, I spoke with experts to find out whether a tax cut alone can restore the Indian stock market's appeal to foreign investors.
Any thoughts on today's newsletter? Share them with the team.
The big story
The clamor for removing tax on long-term capital gains, or LTCG, on foreign portfolio investors is rising in India as the country's equity markets witness record capital outflows.
On Monday, Reuters reported that India's capital market regulator has urged the government to scrap the LTCG tax for foreign investors.
One of India's oldest and most prominent industry bodies, PHD Chamber of Commerce and Industry, last week asked the government appealing to abolish the tax.
It argued that the capital gains tax was increased in 2024 at a time when the stock market was "near record highs" and as the market conditions have now changed, the government needs to review it.
The country's Finance Minister Nirmala Sitharaman on Monday acknowledged the exit of foreign capital outflows and added she would consider the calls for reviewing LTCG tax, as per local media reports.
MUMBAI, MAHARASHTRA, INDIA - 2026/11/02: A shopkeeper holds a lantern below a light bulb for a customer ahead of Diwali, Hindu festival of lights at a lantern market in Mumbai. Diwali, the festival of lights is celebrated by Hindus across the country by shopping for lanterns, new clothes, sweets and snacks ahead of the festival.
Sopa Images | Lightrocket | Getty Images
These demands come at a time when foreign investors' appetite for Indian equities has sharply declined. As per a Nomura report on Monday, foreign holdings in Indian stocks are at an all-time low of 14%.
Experts agree that the removal of the tax cut would improve foreign investors' sentiment by putting India's tax regime on par with other emerging markets. But the tax cut alone may not be enough to bring back foreign investors in droves, they said.
"A tax cut helps at the margin, but allocators tend to buy expected returns, not tax breaks," said Amit Bhartia, portfolio manager at Singapore-based Delorean Partners. He added that foreign investors have exited India as earnings growth became less predictable, while risks shot up.
Bhartia highlighted that foreign investors put in about 570 billion rupees ($6 billion) into Indian equities in September of 2024, and a month later pulled out 940 billion rupees to chase cheaper Chinese stocks. "The tax rate didn't change between those two months. The perceived relative return did," Bhartia explained.
Until the record exit in March this year, the outflows in October 2024 were the highest in a month.
Rising risks
Multiple risks are weighing down Indian markets right now, including strained ties with the U.S., higher energy prices, a depreciating currency and uncertainty over the impact of artificial intelligence.
A possible LTCG cut for foreign investors, a drop in global bond yields and expectations of the rupee holding up on central bank intervention would lend support to the Indian markets, Nomura said in its report.
However, it added that from a longer-term perspective, concerns around geopolitical and technological uncertainty persist, "weighing on long-term growth expectations."
India was the world's third worst-performing market after Indonesia and Turkey between January and October this year, the report showed. India's benchmark Nifty 50 as lost nearly 9% so far this year.
Foreign investors, who just three years ago celebrated India as the best-performing emerging market, have soured over the last two years, cashing out net $18.9 billion in 2025 and more than $30 billion so far this year.
India has "to fight for capital in a competition it could once afford to take for granted," global brokerage Bernstein said in a report on Monday. It argued that multiple "catalysts," including a tax cut and easing of tensions in the Middle East, are needed to reverse capital outflows from India.
"India's valuations remain expensive, while earnings growth has been disappointing," the report said.
As per the data shared in the report, India is trading at a rolling 12-month forward price-to-earnings of 18.6 times, higher than Taiwan's 16.8 times and Korea's 3.9 times. Both these markets have been outperformers in the emerging countries, propped up by strong artificial intelligence names.
On the earnings growth front, while emerging markets on average are expected to deliver a 45% improvement, India's forecast is much slower at 11%, as per Bernstein.
The tax cut alone will not "trigger a major reallocation into Indian equities as the fundamental trade-off facing foreign investors remains unchanged," Hanna Luchnikava-Schorsch, head of Asia-Pacific economics at S&P Global Market Intelligence, told CNBC.
As cracks emerge in the global AI rally, data from LSEG shows Indian benchmark indexes have outperformed global peers over the past month, as some investors see the Indian market as a hedge against AI. Foreign capital flows at the start of this month have been positive. But will they sustain?
India has a strong structural growth story, but investors still need earnings growth to justify the valuation premium, Luchnikava-Schorsch said.
Need to know
Canada-India $5.5 billion bank takeover attracts opposition from workers, politicians
Canadian firm Fairfax Financial Holdings' proposed $5.5 billion takeover of IDBI Bank is facing pushback from employees of the Indian state-owned lender and political parties in the country.
Indian AI infrastructure firm reportedly seeks to raise $3 billion of debt to buy Nvidia's next-generation chips
An artificial intelligence infrastructure firm in India is reportedly seeking to raise debt to fund the purchase of Nvidia's Rubin graphics processing units. AM Intelligence, a Hyderabad-based company, is planning to raise up to $3 billion through bond issues and bank loans to purchase Nvidia Corp's next-generation chips, Bloomberg reported on Friday.
Coming up
Nov. 6: FX reserve data as of Oct. 30 Oct
Nov.10: Equity market closed for Diwali
