What about the macrofundamentals
The Indian economy is expected to grow at over 7 per cent this financial year. This assessment of the Reserve Bank of India (RBI) as well as the International Monetary Fund is expected to have factored in the impact of the myriad disturbances to the world economy — the impact of El Nino, stress in the oil markets as well as uncertainties in the tariff outlook. Inflationary pressures have induced a rate increase in the latest monetary policy review. The current-account deficit (CAD) has remained less than 2 per cent of gross domestic product (GDP) in the past few years, and less than 1 per cent in three of these years. This moderation, alongside a 7 per cent real growth rate, suggests some structural changes supporting a lower net dependence on global resources. A sharp rise in services exports is one such change in recent times. An increase in the India basket of crude oil, alongside the global increase in prices of the fuel, does add an element of concern by the worsened CAD from below 1 per cent to above 1 per cent in 2026.
Corporate revenues and profits overall appear to show good performance. Analysis by Moneycontrol suggests that Nifty 50 companies report an average growth rate of revenue of 18 per cent in both the first and second quarters. Net profits too grew by 18 per cent in the first quarter and about 15 per cent in the second quarter. Clearly, equity markets appear to be disconnected with the performance of companies in recent quarters.
Context for tax reforms being sought
It has been argued that global factors are playing a considerable role in influencing flows of FPIs into and out of India. An increase in interest rates in the United States (US), with a corresponding increase in yields of US treasuries, would raise the risk-free rate of return for global investors, inducing a move of resources back to the US. This momentum is further supported by expanding investment in artificial intelligence (AI), a sector primarily led by the US, followed by China, South Korea, and Taiwan. While the Indian ecosystem is gearing up to expand its interests in the AI space, given the differential interests of the domestic economy, it cannot be at a scale and pace that the global leaders have established. There are, therefore, emerging and sustained pressures for capital to leave the Indian economy in the short run. This trend, however, creates pressure on the currency to depreciate, which lowers returns on equity markets and induces a further round of exits. It is being argued that in this context, dollar returns on investment in India are more adversely affected than the returns in rupee terms. Hence the call to revisit taxing capital gains.
How to think about responding to shocks
Lower taxes are always attractive for all taxpayers. However, any change in the tax structure should be predicated on clear outcomes. The country has experimented with a reduction in corporate tax rates in the last decade as a tool to stimulate private investment. But the evidence of success of such an intervention has been limited. The argument for tax-based corrections to broader policy challenges should be reviewed carefully.
For Indian capital markets, two arguments can be credibly made: One, a review of the need for both capital gains tax and STT at the same time, and, second, the need for and commitment to stability in policy over time.
In the context of capital gains, the regime in India withdrew taxing capital gains and replaced it with STT to increase transparency in the context of then prevailing double tax avoidance agreements and the loopholes for avoiding the taxation of capital gains. In more recent times, long-term capital gains tax has returned. However, STT stays. One possible reform to consider could be withdrawing STT on equity transactions. STT has often been criticised as being an irritant, since it is a transactions tax that does not apply to incomes or to values added.
Turning to a broader question, do FPI flows help render long-term stability to the domestic economy? Foreign capital inflows are important for bridging the CAD, and providing a tool for deepening capital markets. When FPIs liquidate holdings during global market shifts, the resulting currency strain and market drops often generate intense political pressure for state support. This raises a fundamental policy question: Does over-reliance on short-term foreign portfolio flows enhance economic resilience, or does it risk orienting national economic policymaking towards short-term preferences of foreign-asset managers?
Let us consider the case of withdrawing long-term capital gains tax for foreign investors. Do we then create incentives for domestic investors, especially large investors, to undertake round-tripping and re-enter the domestic economy as foreign investors?
Tax reform must be guided by durable, long-term economic objectives rather than panic-driven responses to temporary external shocks. Tax alterations enacted during crises are notoriously difficult to reverse once market conditions normalise, entrenching structural distortions and imposing high political and economic costs. India’s optimal path lies in maintaining macroeconomic stability, eliminating inefficient transaction frictions like STT, and committing itself to a transparent, consistent capital-taxation framework that serves national economic priorities.
The writer is director, National Institute of Public Finance and Policy
 "R Kavita Rao, director of the National Institute of Public Finance and Policy, advocates a review of securities transaction tax and a stable capital taxation framework amid foreign investor outflows and rupee depreciation. | Illustration: Binay Sinha")