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Foreign investors pull out of Indian stocks over tax worries, sell Rs 10,000 crore worth stocks

Samrat Sharma
FPI, FDI, foreign investors, FII, equity, market, pullout, surcharges, super-rich, union budget, economy

Foreign portfolio investors sold equities worth more than Rs 10,000 crore so far in July, the highest pullout by them since October 2018, according to National Securities Depository Limited (NSDL) data. The institutions had sold shares worth Rs 28,921 crore in October 2018. The market has been volatile ever since the Union Budget imposed a surcharge on the super-rich, which is expected to hurt foreign portfolio investors who are not registered as corporates.

In the first six months of the year, there was an inflow of over Rs 65,000 crore on the expectations of a stronger growth outlook after the elections and a market-friendly reform-oriented government," veteran investment advisor Sandip Sabharwal told Financial Express Online. While there have not been many growth-oriented decisions from the government, taxes on profits have been raised in the form of surcharges, he said.

Sabharwal said it makes India a relatively unattractive destination for foreign investors when many other countries are actively pushing economic growth. Interest rates in India also continue to be high compared with competing economies, keeping the growth rate below potential, he said.

However, the accommodative monetary policy by the US Fed could trigger more FPI inflows into the economy. "FPI flows will depend on the performance of key domestic macroeconomic indicators and policies pursued by the government," says a report by rating agency ICRA.

The Union Budget 2019-20 had announced a few steps to attract FPI investment into India, which include rationalising and streamlining of KYC norms for FPIs, proposal to merge NRI portfolio investment schemes with the FPI route, and permitting FPI investments in infrastructure debt funds to be transferred or sold to any domestic investor within a specific lock-in period. However, an increase in surcharge on individuals having taxable incomes more than Rs 2 crore has increased the effective tax rate by 3-7%, which has adversely affected foreign investments.