Having lost confidence in the Indian government's ability to stem the steep fall in the value of the country's currency — the rupee recently touched an all-time low of 96.80 per US dollar -- foreign portfolio investors (FPIs) have started offloading their holdings in the Indian stock market. They have already sold Indian equities worth $ 30 billion so far this year, against $ 18.9 billion over all of last year. Worsening global geopolitical tensions have further aided the FPI exodus.

In rupee terms, FPIs have withdrawn more than Rs 3 lakh crore from Indian equities since January 2026. The aggregate foreign ownership in Indian stocks has nosedived to 14.7% -- a 14-year low. But thanks to domestic institutional as well as retail investors, who have pumped in around Rs 4.7 lakh crore, the Indian market has been saved from collapsing under the pressure of FPI withdrawals.

No doubt, several compounding macro-economic and geopolitical pressures have triggered this unprecedented capital flight. Major drivers include the sharp depreciation (over 6 %) of the Indian rupee against the US dollar. A sharply weaker rupee yields lower returns for foreign investors, accelerating further capital flight.

Unfortunately, the Indian government has not taken any effective steps to restore the value of the rupee as the ruling class is more interested in politicking and electioneering, as well as in appeasing US President Donald Trump who is tightening the screws on the Indian (and other countries') economy in order to bolster the US economy.

Again, global interest rates are going up, with hawkish signals from global central banks and high US interest rate differentials with India making emerging market invest- ments less attractive, especially after factoring in currency hedging costs.

What is more, with the US-Iran hostilities still not resolved and keeping the geopolitical pot boiling in the Middle East, crude oil prices are shooting up and Brent crude has gone from $ 65 to the $ 100-plus mark per barrel. As India imports around 85 per cent of its oil requirements, this import cost spurt will naturally bring down forex reserves, push down the value of the rupee and make the Indian market increasingly vulnerable.

Interestingly, thanks to a massive multi-year bull-run on the back of the fastest-growing global economy, Indian equities are trading at a steep premium as compared to other emerging markets. Hence, FPIs have preferred to shift their investments from a high-priced Indian market to other countries with attractive market conditions. For example, China, our principal competitor, was concerned over the sharp fall of 27.1% in FDI in 2024. Subse- quently, China's Ministry of Commerce prepared an action plan which includes allowing foreign companies to buy local equity stakes using domestic loans, and supporting foreign participation in mergers and acquisitions in China. It has also decided to attract FPIs by expanding cross-border trading channels, abolishing strict investment quotes and incentivising investments in high-tech and advanced manufacturing sectors. Foreign inves- tors can now seamlessly trade eligible China A-shares on the Shanghai and Shenzhen stock exchanges directly from Hong Kong. Again, China has removed mandatory foreign ex- change registration for direct securities, and rules on account and capital management have been drastically relaxed, making the movement and repatriation of dividends and profits much simpler and more predictable. Little wonder then that several FPIs have been shifting their holdings from India to China.

We need to take a leaf from our giant neighbour's playbook and strive to prevent FPIs from leaving India. For a start, long-term capital gains tax on stocks should be abolished and tax on dividends should be removed.