Can FPIs Return to Dalal Street Soon? Nithin Kamath Outlines the Roadblocks

Why It Matters

Sustained FPI outflows strain liquidity and valuation stability in Indian equities, while policy missteps risk eroding the country’s emerging‑market appeal.

Key Takeaways

• FPIs outflows hit ₹1.77 lakh crore FY26
• Geopolitical risk and oil shock deter foreign investors
• High valuations and lack of AI exposure reduce appeal
• LTCG/STCG and higher STT tax burden investors
• Investors shifting to Japan, Taiwan, Korea, Europe

Pulse Analysis

The scale of foreign portfolio investor (FPI) withdrawals this fiscal year marks a turning point for India’s capital markets. With ₹1.77 lakh crore exiting so far—exceeding the previous year’s total—liquidity pressures are intensifying, especially as the outflow streak stretches into its 23rd consecutive session. Analysts attribute the surge to heightened Middle‑East tensions that have amplified oil‑price volatility, prompting risk‑averse investors to favor dollar‑denominated assets. This macro backdrop, combined with a modest 6 % YoY earnings growth forecast for the Nifty 50, underscores the fragility of market sentiment when external shocks intersect with domestic fundamentals.

Beyond geopolitics, structural impediments are eroding India’s attractiveness to overseas capital. Nithin Kamath highlighted the country’s current long‑term and short‑term capital‑gains tax regime, alongside an increased securities transaction tax (STT), as costly frictions compared with peer markets. These fiscal levers diminish net returns for FPIs, especially when valuations appear stretched and the market lacks compelling growth narratives, such as large‑scale AI playbooks. The perception of limited AI exposure further narrows the investment thesis for tech‑focused funds, pushing them toward more innovation‑rich ecosystems in Japan, Taiwan, and Korea.

Policy makers face a narrow window to reverse the outflow trend. Adjusting the LTCG/STCG tax thresholds, rationalising STT, and signalling a stable regulatory environment could restore confidence without sacrificing fiscal prudence. Moreover, encouraging domestic innovation pipelines—particularly in artificial intelligence and deep‑tech—would create the sectoral depth that foreign investors seek. If India can address these low‑hanging structural issues while navigating geopolitical headwinds, it stands a chance to re‑attract FPIs and stabilize market valuations, preserving its status as a premier emerging‑market destination.