India is facing growing calls to remove or reduce long-term capital gains (LTCG) tax for foreign portfolio investors as overseas funds retreat from its equity market. Foreign investors now hold 14% of Indian stocks, a record low, according to a Nomura report cited in the newsletter.

The market regulator has urged the government to scrap the tax, Reuters reported. The PHD Chamber of Commerce and Industry has also called for its removal, arguing that the tax was raised in 2024 when stocks were near record highs and that market conditions have since changed. Finance Minister Nirmala Sitharaman said on Monday that she would consider calls to review the tax, according to local media reports.

A tax cut could bring India’s regime closer to those of other emerging markets and offer a modest boost to investor sentiment. But experts say it is unlikely to be sufficient on its own. Amit Bhartia, a portfolio manager at Singapore-based Delorean Partners, said investors focus on expected returns rather than tax breaks. He attributed the pullback to less predictable earnings growth and rising risks.

Bhartia pointed to foreign investors’ move from buying about 570 billion rupees ($6 billion) of Indian equities in September 2024 to selling 940 billion rupees the following month, as investors shifted toward cheaper Chinese stocks. The tax rate did not change during that period, he said; perceived relative returns did.

Investors are also weighing strained ties with the United States, higher energy prices, a weakening rupee and uncertainty about artificial intelligence’s effects. Nomura said a possible tax cut, lower global bond yields and expectations that central bank intervention would support the rupee could help the market. It also warned that geopolitical and technological uncertainty continues to weigh on longer-term growth expectations.

India was the third-worst-performing market after Indonesia and Turkey from January to October, according to the Nomura report. The Nifty 50 was down nearly 9% so far this year. Foreign investors recorded net outflows of $18.9 billion in 2025 and more than $30 billion so far this year.

Valuations and earnings forecasts remain obstacles. Bernstein said Indian equities were trading at 18.6 times forward earnings, compared with 16.8 times in Taiwan and 3.9 times in South Korea. It forecast earnings growth of 11% for India, versus an average of 45% across emerging markets, and said several catalysts would be needed to reverse the outflows.

Hanna Luchnikava-Schorsch, head of Asia-Pacific economics at S&P Global Market Intelligence, told CNBC that a tax cut alone would not prompt a major shift into Indian equities because the fundamental trade-off for foreign investors would remain unchanged. India’s long-term growth story remains a strength, she said, but earnings growth needs to justify the market’s valuation premium.

The newsletter also noted that Indian benchmark indexes had outperformed global peers over the past month as some investors treated the market as a hedge against artificial intelligence, and that foreign flows at the start of the month had turned positive. Whether those inflows continue remains uncertain.

Sources: CNBC Markets.