The decline in the American market is causing a decrease in the Indian market, which is an understandable phenomenon; however, even when American markets are rising, the Indian market is showing a downturn, which raises questions. The last ten months have been characterized by this trend in the stock market.
Recalling the budget day, the attention of both local and foreign investors was focused on the government in hopes of saving the market. However, expectations were not met: the tax on futures and options transactions (STT) was increased, leading to market instability. The question arises whether the increase in STT was justified in the current situation.
Even after this, there were hopes that the government would take steps to stabilize the market, but over time, these hopes faded. When there was a significant market slump in March of this year, Finance Minister Nirmala Sitharaman was seen talking with industry experts, instilling hope among investors for a possible easing of capital gains or STT taxes. Unfortunately, this issue was also postponed.
The situation was worsened by expensive crude oil and the constant weakening of the Indian currency.
Everyone knows why the market is falling, and the government is aware of it: the reason lies in the mass selling of assets by foreign investors. These investors are withdrawing huge sums of money from the Indian market daily. By 2026, foreign investors have withdrawn more than 400 billion rupees from the Indian stock market, which is a worrying indicator. In the last nine days alone, foreign investors have withdrawn about 60 billion rupees from Indian markets.
Although the market is being supported by the contribution of domestic retail investors, who have become a force in recent years, and by the trust of ordinary Indians in the index through direct stocks and mutual funds, maintaining the Indian stock market in the long term without the participation of foreign investors is extremely difficult. Under such conditions, the responsibility of the government increases.
In particular, the government needs to take effective measures to prevent the uncontrolled sale of assets by foreign investors. Blaming foreign investors is useless. Investors put money where they see the best risk-to-reward ratio and solid profit. A fundamental question needs to be answered: why does the Indian market no longer seem attractive to them, and a solution must be found. Ignoring this serious situation will not improve the situation but only worsen it. The main index of the Indian stock market, Nifty, has fallen by more than 15% from its peak, which is enough to undermine investors' portfolios.
Experts believe that foreign investors are disappointed due to India's complex taxation system. The Long Term Capital Gains (LTCG) tax is 12.5%, and the Short Term Capital Gains (STCG) tax is 20%, which negatively affects FIIs. Furthermore, the increased STT on F&O reduces the margin of foreign funds. The weak rupee exacerbates the situation.
If the stock market remains stable or falls slightly, but the currency depreciates sharply, foreign investors fear direct losses in dollars. The point is that as long as the currency does not stabilize, foreign investors will be reluctant to make large purchases in the Indian market. Meanwhile, higher interest rates in the US and rising yields on American bonds allow foreign investors to earn safe returns exceeding 5% in dollars without risk. Under such conditions, placing funds in the risky stock market of a developing country with a weakening currency does not look like a profitable deal.
Amidst the market turmoil, the question arises: why is the government so slow in taking measures to gain the trust of foreign investors? First and foremost, the government should deeply study the root causes of why foreign investors are scaling back their activities in the Indian market and what their real problems are. Are they concerned about the LTCG rate, or do the increased STT on F&O and changed share buyback rules reduce their profitability? A political decision must be made immediately to lower or ease the tax structure to retain them.
On the other hand, if retail investors have become a real force in the market under current conditions, why are they remaining in this uncertainty? Over the past two years, the market has been in a limited range and constantly sliding downwards. Moreover, it seems that the tax burden is eroding the profits of small investors on all fronts. Now even retail investors are facing this downturn.