MSCI India Index has underperformed the MSCI Emerging Markets Index over the past year by the highest margin in over three decades. Foreign Institutional Investors (FIIs) pulled Rs 3,00,000 crore (about $31 billion) out of Indian equities in 2025 and Rs 3,40,000 crore (about $35 billion) in the first six months of 2026 alone. The rupee has been weak. India’s capital account is struggling, and foreign ownership of Indian stocks at a 15-year low. The window to act is narrowing as global dollar liquidity stays expensive.
Competition for capital is set to intensify further as the US Federal Reserve is widely anticipated to follow the European Central Bank in hiking rates later this year. Thankfully, however, now that India’s valuations have cooled from their 2024 extremes, our discussions suggest that meaningful pools of global capital remain constructive on India’s long-term prospects.The sticking point for foreign investors is India’s capital gains tax (CGT) regime, long been viewed by them as outdated and anomalous. The said CGT regime is increasingly viewed as an avoidable impediment to fresh allocations by large global investors to India, particularly given that most competing markets do not impose comparable capital gains taxes on FIIs.
