The Indian central government scrapped the capital gains tax on foreign institutional investors' holdings of government securities on Friday [1].
This policy shift aims to provide short-term relief to the rupee and encourage the flow of foreign funds into the country [1]. By removing the tax burden on government securities, known as G-Secs, the Centre intends to make Indian sovereign debt more attractive to global investors [1].
The move had an immediate impact on the currency markets. The rupee logged its best single-day gains globally following the announcement [1]. This surge suggests a rapid response from international markets to the change in fiscal policy regarding foreign institutional investors.
Equity markets also reacted to the news, though the gains were more modest. The BSE Sensex reached 75,361.66 points, which was an increase of 178.30 points, or 0.24% [2]. While the markets opened higher, some analysts said to exercise caution amid ongoing trends of foreign portfolio investor selling [2].
The decision to remove the tax is a strategic attempt to stabilize the national currency. By lowering the cost of entry and exit for foreign investors, the government hopes to increase the liquidity of its securities, and reduce volatility in the exchange rate [1]. This approach targets the immediate pressure on the rupee by incentivizing a fresh influx of capital.
“The rupee logged its best single-day gains globally”
The removal of the capital gains tax is a tactical move to attract foreign capital and support the rupee's value. While the immediate market reaction was positive, the long-term success of the policy depends on whether this tax relief outweighs other macroeconomic risks that cause foreign investors to sell Indian assets.
