Emkay Global economist Madhavi Arora suggests lowering the Securities Transaction Tax (STT) could improve market liquidity more effectively than further changes to capital gains tax. The report also highlights that India's 7% growth target remains sensitive to rising global oil prices, despite the potential for capital to rotate into Indian markets from global AI-focused assets.
Reducing the Securities Transaction Tax (STT) could be more effective for Indian market liquidity than further adjustments to Long-Term Capital Gains (LTCG) taxes, according to an analysis by Emkay Global. While the market often focuses on headline LTCG rates, currently at 12.5% for gains above ₹1.25 lakh, experts suggest that removing transaction-based hurdles may yield better results. Currently, investors face a dual cost structure: capital gains taxes and an STT of 0.1% on both the purchase and sale of shares. Lowering or removing this tax, especially in the cash market, could reduce friction for traders and send a positive signal to global investors without the need for extensive legislative changes.
The AI Trade and Market Composition
Investors are currently evaluating the impact of shifting global tech trends, particularly the possibility of capital rotating from Artificial Intelligence (AI) sectors into Indian equities. However, relying on this shift as a primary catalyst for long-term inflows may be optimistic. Emkay Global highlights that the Nifty index is heavily weighted toward financial stocks, which represent approximately 36% of the benchmark. This composition limits India’s direct exposure to the semiconductor and AI-hardware cycles that dominate global tech markets. For foreign investment to return consistently, the market needs stable dollar yields, predictable oil prices, and steady growth in corporate earnings rather than just cyclical rotation from global tech stocks.
Macro Sensitivity to Oil Prices
While the 7% GDP growth projection for the current fiscal year remains realistic, it is highly sensitive to external shocks, particularly energy costs. India’s economic resilience has been supported by public sector firms, including oil marketing companies, which have absorbed significant price volatility. This support is not sustainable in the long run. The country’s energy import bill is a major vulnerability, with crude imports rising more than 24% year-on-year during the first half of the fiscal year. Sustained crude oil prices above $110 per barrel could threaten current growth targets and put pressure on the economy. To achieve a consistent 8% growth rate, which is necessary to support the expanding labor force, structural reforms in energy diversification and manufacturing are becoming more critical than the tactical policy adjustments often seen from the Reserve Bank of India.