BFSI Insight Summit 2026: Lower Taxes Could Bring Foreign Investors Back

What Foreign Investors Need Before Reconsidering Indian Equities

Lower taxes could help, but foreign capital is also waiting for cheaper oil, stronger relative growth and a more compelling earnings outlook.

A tougher hurdle for foreign allocations

Foreign investors are weighing Indian equities against a challenging global backdrop. US Treasury yields have risen, while strong growth and earnings upgrades in developed markets have narrowed India’s relative growth advantage. At the same time, the panel said Indian valuations have moderated but are not yet compellingly cheap. The combination makes it more difficult for global funds to justify increasing exposure.

The comparison is not only about company performance. Higher US yields raise the return investors may expect from riskier assets, meaning Indian companies need to offer sufficiently attractive returns in dollar terms. Panellists said foreign investors are looking for a clearer case that India can outperform other emerging markets, after two years of net outflows.

Oil prices connect macro risk with market sentiment

Crude oil was identified as a more immediate concern for India. One panellist estimated that every $10 increase in oil prices adds about $15 billion to the country’s annual current account deficit. A sustained rise from an average of $75 to $125 a barrel would therefore create a significant external burden, according to the discussion.

For investors, the concern extends beyond the current account. Higher energy costs can weigh on household spending and corporate margins, potentially slowing domestic growth. If worries about the deficit and rupee lead to outflows, currency hedging and short positions could add to market pressure. The panel said funds raised by the RBI between April and August had provided breathing room, but prolonged expensive oil could eventually require lower growth.

Tax relief may ease friction, not replace growth

The panel also raised long-term capital gains taxation as a contentious issue for foreign funds investing across emerging markets. One brokerage executive argued that reducing taxes and making investment easier could help attract capital to a country that needs funding. That could improve India’s appeal at the margin, but panellists cautioned that tax cuts alone would not secure sustained inflows.

The broader test is whether India can restore a meaningful growth differential. Earlier earnings growth of around 10-14 per cent had looked attractive relative to other markets, but investors now need a stronger proposition. Panellists said double-digit earnings growth remains achievable over the longer term, with nominal GDP growth of around 10 per cent providing context for that outlook. It remains an expectation, not a guarantee.

Company results are only part of the investment case

The discussion distinguished macroeconomic pressure from the performance of individual companies. June- and September-quarter results were described as reasonably good, and bottom-up analysis did not indicate a broad deterioration in corporate performance. That offers some reassurance, but does not resolve questions about India’s relative returns, oil exposure or market valuations.

Foreign investors are also asking whether large Indian companies are positioned for the next phase of growth. Rising per-capita income, consumer spending, organised retail, ecommerce, electric vehicles and infrastructure were cited as potential opportunity areas. The challenge is turning those themes into credible business plans and future earnings. Investors may look for companies to demonstrate their capacity to build new businesses, rather than rely on policy incentives to drive investment.

Key Highlights

• Foreign investors want a stronger growth advantage for India relative to other emerging markets.
• Higher US Treasury yields raise the return hurdle for riskier assets, including Indian equities.
• Rising crude prices could increase external pressure and weigh on spending and corporate margins.
• Lower capital gains taxes may reduce investment friction but are unlikely to guarantee sustained inflows.
• Reasonably good quarterly results have not removed questions about valuations and future-facing growth.

Investor Note: Foreign inflows may improve if oil cools, relative growth strengthens and the investment environment becomes more attractive. Investors should treat these as conditions to monitor, not assurances of a near-term return of capital, and assess company earnings prospects alongside macroeconomic risks.