Foreign institutional investors (FIIs) have pulled a staggering $23 billion out of Indian equities, with about $19 billion exiting in 2025 and another $4 billion in January 2026, raising alarm bells for Indian markets ahead of the Union Budget 2026. The sharp outflow is driven by a weaker rupee and lower post-tax returns, which make high-valued Indian stocks less attractive compared with safer opportunities in developed markets.
With this backdrop, all eyes are on Finance Minister Nirmala Sitharaman’s Budget, as investors hope for policy measures that could help stem the tide of foreign capital leaving the country. Experts and market participants believe the Budget must address factors that influence foreign flows, including tax structures, earnings growth and wider structural reforms.
According to Nimesh Chandan, Chief Investment Officer at Bajaj Finserv Asset Management, the Budget is being watched closely for steps that could attract durable foreign direct and portfolio investment into the Indian economy. Government consideration of tax relief specifically for foreign portfolio investors (FPIs) is seen as a potential positive for equities and a boost to investor sentiment, though some analysts caution it may not be the base case.
Analysts from Morgan Stanley suggest that broader reforms could include expanding the base of foreign portfolio investors, simplifying buyback taxation and enhancing tax benefits at Gift City to make Indian markets more attractive to global capital. These measures are aimed at attracting more diverse and stable pools of investment.
Tax experts argue that the current 12.50 % long-term capital gains tax for foreign investors could be lowered for longer holding periods, which may improve effective returns after adjusting for tax and currency depreciation. This change could make Indian equities more competitive against risk-free returns in developed economies and encourage FPIs to return.
Market managers also stress that stronger earnings growth supported by corporate tax cuts or other incentives would be crucial to justify high valuations and lure foreign investors back. They note that while broader relief on corporate earnings may lie outside the direct remit of the Budget, overall clarity and stability in policy and taxation could help restore confidence.
However, some analysts, including those from Axis Securities, argue that stability and long-term growth visibility matter more than short-term incentives. They contend that any changes should be aligned with India’s long-term competitiveness rather than simply attracting transient funds.
As markets await the Budget, investors are focused on whether it can tackle the structural and policy challenges behind the FII exodus or whether deeper reforms are required to keep global capital engaged with Indian equities.
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