State Bank of India’s research division has put forward a set of policy recommendations aimed at curbing the recent surge in foreign portfolio outflows from Indian equities. In an Ecowrap report, SBI Research argued that the government should consider extending the mandatory holding period for equity investments to two or three years and eliminate the 12.5% long‑term capital gains (LTCG) tax currently levied on foreign investors.
Proposal to scrap LTCG tax and extend holding periods
The report stresses that such measures would “anchor hot money flows” into the equity segment, encouraging investors to maintain longer‑term positions rather than reacting to short‑term market volatility. By removing the LTCG tax, which was retained in the Union Budget 2026 for listed shares and equity mutual funds, the researchers believe foreign capital would become more stable, reducing the risk of abrupt withdrawals that could put additional pressure on the rupee.
SBI Research also highlighted the broader macro‑economic context, noting that the Reserve Bank of India (RBI) has already deployed a “bazooka of measures” to counter a depreciating rupee. While the central bank’s actions are aimed at mitigating external pressures, the report argues that fiscal policy must also address structural issues that affect capital inflows.
Escalating foreign portfolio outflows in 2026
Data cited in the report show that foreign portfolio investors (FPIs) have sold Indian equities worth Rs 44,166 crore in October alone, pushing total withdrawals for the calendar year to more than Rs 3 lakh crore. This figure markedly exceeds the Rs 1.66 lakh crore withdrawn throughout 2025. The surge in outflows reflects a confluence of factors, including higher crude‑oil prices, a stronger US dollar and rising US bond yields, all of which have dampened investor sentiment toward Indian markets.
Additionally, the report points to an artificial‑intelligence‑driven rally in North Asian markets that is attracting foreign capital away from India. Analysts cited by SBI Research note that India currently lacks a sufficient number of stocks linked to the AI theme, making it less attractive to investors seeking exposure to that growth story.
Higher yields on US Treasury securities also provide a comparatively safer and more lucrative alternative for foreign investors, further incentivising the shift of capital out of Indian equities.
Additional recommendations on export earnings and borrowing taxes
Beyond equity‑related tax policy, the SBI Research report proposes simplifying the repatriation of export proceeds. It suggests setting a standard timeframe of around six months for exporters to bring foreign‑currency earnings back to India, aligning with the typical credit periods that exporters already extend to overseas buyers. Requests for extensions beyond six months would be evaluated on a case‑by‑case basis.
The report also calls for greater clarity on the withholding tax regime for external commercial borrowings (ECBs), which presently ranges from 5% to 20%. Clearer rules, it argues, would help borrowers benefit consistently from Double Taxation Avoidance Agreements (DTAAs) and would improve confidence among foreign lenders.
By addressing both the equity tax structure and the procedural aspects of export earnings and ECBs, SBI Research aims to create a more predictable environment for foreign investors, thereby supporting foreign‑currency inflows and strengthening India’s external accounts.
In summary, the research arm of the country’s largest lender sees the abolition of the LTCG tax and an extension of holding periods as pivotal steps toward stabilising foreign portfolio flows. Coupled with streamlined export‑repatriation processes and clearer ECB tax rules, these measures are presented as a comprehensive approach to mitigate the current outflow pressures and to foster a more resilient investment climate for foreign participants in Indian markets.
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