Foreign institutional investors (FIIs) have yanked a staggering $23 billion from Indian equities, $19 billion in 2025 and another $4 billion already in January 2026, leaving markets desperate for Finance Minister Nirmala Sitharaman to pull a rabbit out of her Budget hat today. The exodus has deepened as rupee depreciation and lackluster returns post-tax adjustments make India's richly valued stocks look increasingly unappetizing compared to risk-free returns in developed markets.
"This Budget comes at a very crucial juncture as far as markets are concerned," says Nimesh Chandan, Chief Investment Officer at Bajaj Finserv Asset Management Limited. "The most important area to watch will be the steps the Finance Minister takes to attract durable FDI and FPI flows into the economy."
According to news reports, the government is weighing tax relief specifically for FPIs, a potential game-changer that investment bank Jefferies says "could be a positive for equities" and "a tailwind for cash equities," though the firm cautions it's "not our base case."
Morgan Stanley's Ridham Desai sees broader reform possibilities: "It is quite possible that the budget proposes broadening the base of foreign portfolio investors to allow more pools of capital to access Indian stocks." He flags two other key reforms—simplifying buyback taxation, "which currently threatens to distort capital structures and thus hurt long-term flows into the capital markets," and further enhancing tax benefits at Gift City.
Manoj Purohit, Partner - Financial Services Tax at BDO India, lays bare the FPI dilemma: "Notwithstanding the robust headline returns in Indian markets, the effective returns to foreign investors, once adjusted for applicable taxes and depreciation of the rupee via inflation, are materially lower than the returns on risk-free securities offered in foreign markets."
He advocates slashing the current 12.50% long-term capital gains tax for foreign investors who hold investments for two to three years, with lower rates for longer tenures. "While the US keeps playing its 'Trump' card of federal rates to attract foreign investors, the Indian policymakers can incentivise foreign investors with competitive tax rates," Purohit argues, suggesting the relief be targeted at stable Category I FPIs comprising foreign banks, insurance companies, pension and sovereign funds.
"At the moment, a major yardstick for investors to evaluate the Budget is whether it supports India Inc's earnings growth or offering any direct tax relief to investors," says Rajkumar Singhal, CEO of Quest Investment Managers. "A significant earnings growth is essential for domestic equities to justify its high valuation, compared to other emerging markets, and facilitate an FPI comeback."
Singhal points to corporate tax cuts, capital gains tax reductions, and income-tax relief as key levers—though he notes GST relief, while important for corporate earnings, falls outside the Union Budget's purview.
But not everyone's convinced tax sops are the answer. Rajesh Palviya, Head of Research at Axis Securities, strikes a more cautious note: "Stability matters more than sops. While rationalising aspects of the capital gains framework and improving clarity around taxation could help sentiment, FIIs primarily respond to growth visibility, policy consistency, and currency stability."
"Any incentives, if considered, should be measured and aligned with India's long-term competitiveness rather than short-term flows," Palviya adds.
Chandan flags another priority: supporting sectors hit by US tariffs while maintaining fiscal prudence. "The Government has done a lot in the last year to stimulate domestic demand and to ensure India remains the fastest growing economy in its peer group," he says, noting consumption is showing signs of revival. The Budget is expected to maintain focus on government capex and defense spending, while investors look for incentives to spur private capital expenditure.
With India's stock valuations stretched compared to emerging market peers and currency pressures mounting, all eyes are on whether Sitharaman's Budget can reverse the foreign investor flight, or whether deeper structural fixes are needed to keep global capital from heading for the exits.
