New Delhi – To counter persistent foreign portfolio investor (FPI) outflows and stabilize the Indian Rupee, Prasanna Tantri, an associate professor of finance at the Indian School of Business (ISB), has recommended that the government consider cutting capital gains tax. This measure, he suggests, would improve equity returns and make Indian markets more attractive to global investors.
Professor Tantri also advocated for higher interest rates to enhance the appeal of rupee-denominated debt. These proposals come as the rupee faces renewed pressure from significant FPI withdrawals.
FPI Outflows Weigh Heavily on Rupee
According to Tantri, FPIs had withdrawn a substantial ₹27,507 crore from Indian markets in September 2026 by the 21st of the month. This included ₹17,235 crore from equities, reversing the inflows observed in July and August. Debt markets also saw considerable selling, with ₹10,272 crore pulled out, following minor outflows in August and significant inflows in June and July.
The professor noted that September's debt outflow was already nearing April 2026’s high of ₹10,826 crore, indicating a concerning trend.
Rupee's Recent Performance
On September 22, 2026, the Indian Rupee settled at ₹95.59 against the US dollar, marking a modest gain of approximately 0.2% from its previous close of around ₹95.82. However, just days prior, on September 18, it had weakened by about 0.3%, closing at ₹95.8725 per dollar.
Understanding the FPI Exodus
Tantri attributes the FPI exodus primarily to low relative real interest rates, which diminish the attractiveness of Indian debt. Recent interest rate hikes by central banks in the United States, the Euro area, and Japan have further eroded India's relative yield advantage, making other global markets more appealing for bond investors.
For equity investors, the key driver is anticipated future growth, rather than just current growth figures. Tantri explained, "Much of India's current growth comes from correcting past misallocation of resources and removing old bottlenecks. That is valuable, but it can take us only so far." He emphasized that India needs to demonstrate leadership in emerging sectors, excel in high technology, and secure international competitiveness to attract long-term equity investment.
Foreign Direct Investment Offers a Counterpoint
Amidst the FPI concerns, net foreign direct investment (FDI) presents a positive outlook. During April-June 2026, net FDI reached approximately $7.8 billion, marginally surpassing the total $7.7 billion recorded for the entire fiscal year 2025-26.
Policy Recommendations for Stability and Growth
In the short term, Professor Tantri reiterated the need for immediate policy interventions: "India should consider capital-gains tax cuts to improve equity returns and higher interest rates to restore the attractiveness of rupee debt."
Looking ahead, he advised a strategic long-term approach: "In the long run, industrial policy must focus squarely on making India a global leader in high-technology and other sunrise sectors." This dual strategy aims to address immediate market pressures while building a foundation for sustained economic leadership.