Foreigners sell nearly $1 billion in equities in two days since Budget

Foreign investors sold nearly $1 billion worth of Indian equities in the two days since the government raised taxes on derivatives trades and on capital gains from equity investments in its annual budget.

Foreign portfolio investors (FPIs) net sold shares worth Rs 8,10 crore ($968 million) on Tuesday and Wednesday, provisional data from the National Stock Exchange showed.

These investors, anticipating the budget, had bought equities worth a net amount of $2.20 billion in six sessions before the presentation on Tuesday.

They have invested a net $5.1 billion so far this year.

The increase in capital gains tax is clearly a negative even if the increase on long-term gains is moderate, said Ashish Gupta, chief investment officer at Axis Mutual Fund.

Uncertainty over whether the long-term capital gains tax rate of 12.5 per cent could go up further creates pressure for the market, he added.

"Long term, we do not see much of an impact since the growth story remains intact and companies continue to grow."

India's benchmark indexes Nifty 50 and Sensex gained about 2 per cent during the pre-budget FPI buying spree.

They had risen about 3 per cent between July 11 and July 18, but a 1 per cent drop due to a global cyber outage on July 19 trimmed the gains.

Since the budget, the indexes have shed about 1 per cent. Sectors in which FPIs have more holdings - financial services, banks and private banks - fell about 3 per cent each.

However, domestic institutional investors have remained buyers, investing a net $0.55 billion since the budget.

The impact of the tax changes went beyond equities, as the rupee fell to record lows on both the budget day and Wednesday amid a souring sentiment.

The tax changes are intended to discourage "excessive speculation" in the derivatives market and encourage long-term investment, a top finance ministry official told Reuters.

"Moving activity from the derivative segment to the cash segment and moving it from short-term speculation to long-term investment are objectives which the government has in mind and some of our tax changes are done with those objectives in mind," T.V. Somanathan said.

Separately, India's markets regulator on Wednesday said the number of intraday traders in the equity cash market jumped 300 per cent between fiscal years 2019 and 2023, with seven out of ten traders making losses.