Whalesbook
Plea for Tax Holiday to Stem FPI Exodus
Facing significant pressure on the Indian rupee, former Infosys CFO Mohandas Pai has proposed a radical tax solution. He is urging the government to grant a five-year waiver on capital gains taxes for all registered Foreign Portfolio Investors (FPIs) on their new investments. Pai believes this measure would not only stop FPIs from selling their holdings but also attract substantial new capital, thereby stabilizing the depreciating rupee.
Attracting $20 Billion in New Capital
Pai estimates that this multi-year tax holiday could bring at least $20 billion in fresh global capital into the Indian market. He argues that the waiver would also eliminate tax-related harassment for foreign investors. On Friday, May 22, 2026, the rupee showed a slight technical recovery, trading at 96.18 against the US dollar. This uptick was supported by intervention from the Reserve Bank of India (RBI), which sold dollars, and a minor dip in Brent crude oil prices to $105.01 per barrel.
Calls for Broader Tax Reform
This suggestion aligns with previous calls for tax reform from market figures. Samir Arora, founder of Helios Capital, has previously advocated for substantial changes to capital gains tax to boost foreign investment in Indian equities. Before the Union Budget 2026, Arora proposed a zero long-term capital gains (LTCG) tax and a reversion of short-term capital gains (STCG) tax to 10%, stating that minor adjustments would not be enough to revive market sentiment.
Persistent Outflows Despite Reform Calls
Despite these proposals, FPIs have continued to withdraw capital from Indian equities in 2026. Net outflows in May reached ₹27,048 crore, bringing the year's cumulative outflows past ₹2.2 lakh crore, surpassing the ₹1.66 lakh crore withdrawn in the whole of 2025. This sustained selling, fueled by global economic uncertainty, rising US yields, and geopolitical tensions, has severely weakened the rupee. The currency has dropped from around 90 at the start of 2026 to over 96 against the US dollar. Although the RBI has intervened, elevated crude oil prices around $105 per barrel continue to add pressure. The Indian government has indicated it is not currently considering cuts to capital gains tax for FPIs.
Outlook for Policy Changes
Whether a capital gains tax waiver would effectively attract significant capital remains a point of discussion. Proponents see it as a potential catalyst, while critics point to broader global economic factors influencing FPI flows. Market observers are watching for any policy shifts that could address the ongoing outflows and stabilize the rupee amid global economic challenges. FPI ownership in Indian equities has recently decreased to about 15%, indicating a notable reduction in foreign participation.