The Indian stock market has been experiencing a severe downturn, marked by its longest losing streak in nearly three decades and a significant erosion of investor wealth. This decline is attributed to a combination of factors, including weak corporate earnings, persistent foreign outflows, and uncertainty over U.S. tariffs. Additionally, government policies and regulatory changes have played a crucial role in shaping investor sentiment and market performance.
Recent government policies, such as the increase in Long-Term Capital Gains (LTCG) tax and the introduction of various taxes like Goods and Services Tax (GST) and Securities Transaction Tax (STT), have added complexity and cost to financial transactions. These measures, intended to boost government revenues, have raised concerns about their potential to deter investment by reducing post-tax returns for investors. Critics argue that while the intent is understandable, the timing and magnitude of these measures may have been counterproductive, leading to capital outflows and market volatility.
Foreign Institutional Investors (FIIs) have been instrumental in the growth of India’s stock market by providing liquidity and capital. However, since October 2024, FIIs have withdrawn approximately ₹3 lakh crore from Indian equities, contributing to notable corrections in major indices. This exodus is attributed to concerns over India’s economic slowdown, weak corporate earnings, and more attractive investment opportunities in other emerging markets like China.
The depreciation of the Indian rupee against the U.S. dollar has further complicated the investment landscape. In 2024, the INR weakened for the seventh consecutive year, closing at 85.6150 per U.S. dollar—a 2.8% decline. For FIIs, currency depreciation erodes the value of their investments when converted back to their home currency, diminishing overall returns. To illustrate this impact, consider an example where an FII invests ₹100 crore in Indian equities. Assuming a 10% capital appreciation, the gain would be ₹10 crore. With the LTCG tax rate at 12.5%, the tax liability would be ₹1.25 crore, leaving a net gain of ₹8.75 crore. If the INR depreciates by 5% against the U.S. dollar, the value of the investment in dollar terms decreases correspondingly. This demonstrates how taxation and currency depreciation can substantially reduce returns for FIIs, making Indian markets less attractive.
The Finance Ministry’s approach to increasing tax rates and implementing stringent regulations has been met with criticism. Critics argue that while the intent to boost revenue and ensure market stability is understandable, the timing and magnitude of these measures may have been counterproductive. In an environment where global investors are highly sensitive to returns and risks, such policy decisions could be perceived as deterrents to investment, leading to capital outflows and market volatility.
The current market downturn underscores the need for a comprehensive assessment of the factors contributing to investor apprehension and the development of strategies to restore confidence in the Indian stock market. The recent downturn highlights the intricate interplay between government policies, regulatory frameworks, investor sentiment, and macroeconomic factors such as currency movements. While taxation and regulation are essential for a robust financial system, finding the right balance is crucial to maintain investor confidence and market stability. As India navigates these challenges, policymakers must carefully consider the broader implications of fiscal and regulatory measures to foster a conducive environment for both domestic and foreign investors.
