FPIs return to Dalal Street amid AI sell-off and oil slump; Can proposed tax cuts sustain inflows?

Indian stocks have staged a strong comeback in recent sessions, with benchmark indices witnessing a sustained rally that bulls had been eagerly awaiting since the beginning of the year.

While there have been no significant domestic triggers behind the upmove, the rally has largely been driven by the return of foreign investors, who had largely stayed away from Asia's third-largest economy in recent months.

Their shift in sentiment comes amid a rotation away from AI-linked stocks, driven by concerns over a slowdown in data center expansion following the Democrats' victories in both houses.

A sharp retreat in crude oil prices has also boosted foreign investors' optimism towards Indian equities, prompting FPIs to pour ₹53,739 crore into domestic stocks in November so far, according to NSDL data. The inflows have helped the Nifty 50 extend its winning streak to seven consecutive sessions, enabling the benchmark index to pare its year-to-date losses to 4.15%.

The key question now is whether the return of foreign investors signals a durable turnaround or is merely a tactical shift driven by global developments and expectations of tax relief.

To understand what is driving the change in FPI sentiment, the possibility of capital gains tax relief, and whether the recent inflows can be sustained, Manoj Purohit, Partner & Leader, Financial Services Tax, Tax & Regulatory Services, BDO India, shared his views.

Edited excerpts:

What factors are driving renewed optimism among foreign portfolio investors (FPIs) towards Indian equities, and could the upcoming Budget 2027 play a role?

Foreign investors are reassessing their current exposure to India amid ongoing discussions and representations by industry bodies and various associations seeking tax breaks on long-term investments.

In addition to expectations of tax relief, the recent US midterm elections could influence the revision and revival of various trade policies.

In 2026, to date, FPIs have been constantly exiting the Indian capital market; however, the recent few weeks have witnessed a wait-and-watch approach towards large stake sales in Indian listed companies, as expectations of capital market tax reforms gather momentum.

The recent propositions made to the government and positive assurance from the Finance Ministry to express readiness to revisit the taxation framework for long-term investors in the upcoming Budget 2027 have made foreign investors pause and relook at the Indian equity market from a long-term perspective.

Are long-term foreign investors postponing stake sales in anticipation of changes to the capital gains tax regime?

Investors holding long-term positions with significant unrealised gains are reportedly postponing exits while awaiting clarity on whether the government will rationalise the taxation of equity investments and reduce transaction costs.

India is evaluating measures to strengthen its position as a preferred destination for global capital.

Discussions among policymakers, regulators, and industry stakeholders have centered on rationalising the Securities Transaction Tax (STT), simplifying capital gains taxation, and providing potential relief under the Long-Term Capital Gains (LTCG) regime for offshore institutional investors.

What changes are industry bodies seeking in the LTCG, STCG, and STT frameworks?

Expectations of a broader overhaul have gathered pace in recent months. Industry expectations are centered around abolishing the current 12.5% LTCG tax on foreign investors' equity investments, resulting in a reduction in tax costs.

Industry bodies have echoed similar views and advocated restoring the LTCG exemption on listed securities and enhancing tax certainty, thereby rationalising LTCG, Short-Term Capital Gains (STCG) tax, and STT provisions.

Together, these proposals aim to reduce transaction costs, improve market liquidity, deepen capital markets, make it competitive with other jurisdictions that have very minimal or NIL capital gains tax, and attract long-term foreign investment.

How could changes in taxation of debt investments influence foreign investors' allocation towards equities?

The discussion on making equity tax reforms lucrative is also relevant given that the revenue authorities had already announced a few favorable tax measures associated with certain debt investments, including specified government securities (G-Secs).

With the tax arbitrage between debt and equity tapering, investors are now evaluating asset allocation decisions based on overall post-tax returns rather than considering only the tax outflow.

How are global developments, including US trade policies and interest rate expectations, influencing FPI sentiment towards India?

The cautious stance of FPIs also coincides with a more supportive global backdrop. Political developments in the United States have rejuvenated hopes to ease the aggressive trade measures, while expectations of lower global interest rates, strengthening of exchange rates and improved liquidity conditions have strengthened sentiment towards emerging markets, including India.

This will positively impact the current trade restrictions and improve the Quarter 3 and 4 for the Indian business houses.