New Delhi [India], November 3 (ANI): A sustained return of foreign institutional investors (FIIs) to Indian equities will depend not only on possible relief in long-term capital gains (LTCG) taxation but also on stability in the rupee and an improvement in the geopolitical situation in West Asia, independent market analyst Ambareesh Baliga said.

Baliga said removing LTCG tax could provide a significant boost to investor sentiment, as foreign investors have faced the combined impact of capital gains taxation and rupee depreciation.

However, he said the currency outlook and geopolitical developments would remain important factors in determining the direction of foreign fund flows.

'If these things fall in place, I think you'll have the foreign investors coming back. But right now it's very difficult to say whether this is the beginning of the new comeback of FIIs or whether that would happen in 2027,' Baliga told ANI in an exclusive conversation.

Long-Term Capital Gains (LTCG) tax is a levy imposed on profits earned from selling capital assets, such as real estate, listed stocks, or mutual funds, that are held beyond 12 months for equities.

While capital gains taxation has existed in India since 1947, the tax on listed equity shares was completely abolished in 2004 in exchange for the Securities Transaction Tax (STT) to encourage stock market investments.

However, the government reintroduced the LTCG tax on listed equities in 2018 at a 10 per cent rate under Section 112A, which was later revised in 2024 to a 12.5 per cent rate for gains exceeding an annual exemption limit of Rs 1.25 lakh.

He also raised concerns over dividend taxation, arguing that dividends are distributed from post-tax income and are therefore subject to double taxation.

He said addressing both LTCG and dividend taxation could improve sentiment among foreign as well as domestic investors.

However, he pointed out that tax changes alone may not be sufficient to bring back foreign investors in a sustained manner. The West Asia conflict remains a major concern, as its resolution could ease pressure on crude oil prices and support the Indian rupee, which has depreciated sharply.

Lower oil prices could help the rupee recover to some extent and remain stable, an important consideration for overseas investors assessing returns from Indian assets.

On recent foreign investor buying after months of heavy selling, Baliga cautioned against treating a few sessions of inflows as confirmation of a sustained comeback.

He said Indian markets had demonstrated considerable depth over the past two years despite record foreign selling, showing that the market could absorb large outflows.

Baliga added that India's economic growth prospects would continue to make it an important destination for global investors.

The recent recovery in domestic equities has also been supported by better-than-expected corporate earnings and hopes of an improvement in the West Asia situation.

Baliga said second-quarter earnings had been reasonably good, with several companies reporting numbers above market expectations.

He said a positive outcome on geopolitical tensions and possible tax changes could provide further support to Indian equities after nearly two years of underperformance.

However, he cautioned that it was too early to conclude that markets had bottomed out, adding that investors would need to watch how developments unfold over the next couple of weeks. (ANI)