STT + LTCG - FPI = ?

"At a press briefing in Bangkok on 15 October, the International Monetary Fund (IMF) said India entered the energy shock with strong fundamentals and has responded well to it, and that pressure on its exchange rate should not be read as a sign of failure." "It said benchmark interest rates in advanced economies have climbed to multi-decade highs, pushing up the borrowing costs for emerging markets." ET. Since the rupee is essential for every moment of our lives, from food to education and healthcare, its weakness signifies a weakness of the economy and governance for us. "Finance Minister Nirmala Sitharaman said on 13 October that while the Reserve Bank of India (RBI) would continue its efforts to curb volatility in the rupee but is not seeking to fix its value, as the currency faces pressure from outside factors." On 12 October, the rupee appreciated 93 paise, logging its steepest single-day gain in more than six months," and on the 13th, "The rupee appreciated 82 paise to 94.96 against US dollar,...supported by various RBI measures aimed at reducing immediate dollar demand and curbing excessive positions in the foreign exchange market." Mint. Since the rupee has jumped from 96.795 against one dollar on 08 October (in. investing.com) to 94.84, nearly 200 paise, to one dollar (xe.com) this morning, isn't the RBI causing more volatility by its actions? One reason for the weakness of the rupee is the selling of Indian equities by foreign portfolio investors (FPIs) who sold a net Rs 2.6 trillion worth of equities in the first nine months of 2026. "The Nifty 50 traded at 20.5 times trailing 12-month earnings on 30 September, down from 25 times at the September 2024 market peak. Yet the index fell 18.4% in dollar terms during January-September, underperforming all six global peers," wrote Mayur Bhalerao. In 2025, even as FPIs sold a net $18.9 billion worth of equities, domestic institutional investors (DIIs) bought a record $90.1 billion worth, nearly five times as much. In 2026, FPIs have net sold $27.8 billion worth till September, while DIIs have bought $64.6 billion. Mint. The problem is that DIIs are investing in rupees while FPIs are repatriating their proceeds in dollars. So the rupee falls. Even worse, DIIs push up the prices of shares, which gives greater returns to FPIs, while the RBI's support of the rupee increases the amount of dollars FPIs get when they convert their rupees to dollars. "For too long have successive governors said RBI does not target any level for the rupee but only manages its market volatility. Few believe that." "The reality is that the domestic currency will not be relieved of pressure so long as global oil prices rule high (India imports almost 90% of its needs), global bond yields harden, capital imports sputter and the dollar index stays high." Mint. One big reason for FPI-selling could be that in July 2004, "Long-term capital gains (LTCG) tax on listed equity was axed, while tax on short-term gains was cut to 10%, but a new STT (Securities Transaction Tax) was levied in lieu of that relief." Since STT is incurred on every transaction, the tax is generated even when shares are being sold at a loss. In 2023-24, the Nifty rose 28% and STT collections rose 35%, while in 2025-26, the Nifty fell 5% but STT still jumped 8%. In 2018, LTCG tax was reintroduced at 10% and increased to 12.5% in 2024, while the tax on short-term gains jumped to 20%, but the STT stayed as it was, wrote S Sreedharan & A Raghavendra M. Naturally, FPIs feel short changed. When the government resorts to extortion, Indians stay captive but foreigners can escape. The IMF said our fundamentals are strong. True, strongly wrong.