Dalal Street has hit a purple patch in the last few sessions, and has staged a turnaround, with the Sensex gaining nearly 3,000 points as foreign investors return to stock market after months of sustained selling. The change in institutional flows has emerged as the biggest factor behind the improvement in market sentiment, with foreign institutional investors (FIIs) turning net buyers and increasingly supporting the rally in heavyweight stocks.The recovery has come at a time when concerns over foreign investor outflows had been weighing on Indian equities.
But the latest numbers suggest that the selling pressure is easing, with FIIs not only returning as buyers but also increasing their purchases.The Sensex gained 1,233.25 points on November 2 and another 1,225.07 points on November 3. It was trading around 400 points higher in Wednesday's morning session, taking the cumulative gains across the three sessions to nearly 2,900 points.The Nifty has also extended its recovery, moving above the 23,800 mark after closing at 23,440.80 on Monday and 23,810.85 on Tuesday.
The rally has been supported by better-than-expected corporate earnings, easing crude oil prices and improving global sentiment. However, the most significant change has been the return of foreign buying.
FIIs RETURN AFTER MONTHS OF SELLINGThe latest institutional flow data shows a clear improvement in foreign investor activity.On November 3, FIIs were net buyers of Indian equities worth Rs 6,836.81 crore. This followed net purchases of Rs 3,114.68 crore on November 2.
They had also bought shares worth Rs 3,598.54 crore on October 30. Together, FIIs purchased equities worth nearly Rs 13,550 crore across these three sessions alone.The broader trend is also encouraging.
In the 12 trading sessions visible in the data between October 16 and November 3, FIIs were net buyers in eight sessions. Their cumulative net purchases across these sessions stood at around Rs 14,725 crore.The pace of buying has picked up sharply in the latest sessions.
This is important because foreign investors had been a major source of selling pressure on Indian equities, with overseas funds withdrawing heavily from the market this year.Dr V K Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, said the reversal in FII sentiment has been the principal factor behind the change in market mood."There is a distinct change in the market mood now. This has changed the market construct, too.
The principal factor that has changed the market mood is the sudden reversal of the FII stance towards India. The sustained selling by FIIs have been weighing on the market for the last two years.
This is changing now. In five out of the last six trading days, FIIs have been buyers in the market.
They bought stocks for Rs 18,661 crores," he said.Vijayakumar added that the buying volume is increasing, with strong corporate earnings and attractive valuations in large-cap stocks providing fundamental support to the rally.He also pointed to the weakening of the AI trade as a factor that has facilitated the return of foreign investors.WHY THE RETURN OF FII MATTERSThe return of foreign investors is significant because their selling had been a persistent overhang for Indian equities. When large overseas funds reduce exposure to a market, the selling can put pressure on heavyweight stocks and drag benchmark indices lower.The latest buying has helped reverse some of that pressure.
Large-cap stocks are particularly important in this phase because they tend to attract bigger institutional flows.Vijayakumar believes the current recovery could have a widespread character, but expects large-cap stocks to lead the rally as they have the capacity to attract significant FII investments. He also sees room for leading financial stocks to move higher, supported by short covering.The recent improvement in foreign flows is also coinciding with a period of relatively strong corporate earnings.
This has helped investors reassess valuations in some of India's largest companies after the market correction.However, the shift in FII behaviour does not mean that selling has completely disappeared. The data shows that foreign investors were net sellers on October 29 and October 26.
What has changed is the frequency and size of their buying in the latest sessions.SEBI'S LTCG PROPOSAL: COULD TAX RELIEF BRING MORE FOREIGN MONEY?The improvement in FII flows comes amid a renewed debate over India's capital gains tax structure.Sebi has reportedly recommended that the government remove long-term capital gains tax on foreign equity investments. The market regulator has also proposed exempting domestic mutual fund investors from LTCG tax when they switch from one scheme to another, provided they have held the existing investment for more than a year.These proposals are part of Sebi's pre-Budget recommendations and are not binding.
The final decision rests with the government.The recommendations come after sustained feedback from foreign investors about the tax burden and the cost of investing in Indian equities. Overseas investors have also been concerned about India's relative attractiveness compared with other markets.Finance Minister Nirmala Sitharaman has acknowledged the concerns and indicated that the government would consider them.Speaking at an event in Mumbai, Sitharaman said the circumstances had changed and that investor concerns had become louder.
She said she appreciated the feedback and would consider reviewing it, while underlining the need for capital to sustain India's economic growth of more than 7%.The Finance Minister, however, did not announce any tax reduction or promise that the government would accept Sebi's recommendations. She also highlighted the need to consider domestic investors rather than focus only on attracting foreign capital.WHAT IS THE LTCG TAX RIGHT NOW FOR FII AND DOMESTIC INVESTORS?Under the current tax structure, long-term capital gains on listed equity shares and equity-oriented mutual funds held for more than 12 months are generally taxed at 12.5% on gains exceeding Rs 1.25 lakh in a financial year, subject to the applicable Securities Transaction Tax (STT) conditions.This rate applies to eligible foreign portfolio investors as well as domestic investors.
The tax rate was increased from 10% to 12.5% in the 2024 Budget, while the annual exemption threshold was raised from Rs 1 lakh to Rs 1.25 lakh.For short-term gains on listed equity shares and equity-oriented mutual funds held for 12 months or less, the tax rate is 20%, where the prescribed STT conditions are met.It is important to understand that DIIs do not have a separate blanket LTCG rate. Domestic institutional investors include mutual funds, insurance companies, banks and other institutions, and their tax treatment depends on their legal structure and the nature of their investments.
For eligible listed-equity gains, the applicable Section 112A rate is 12.5%, just as it is for eligible foreign investors.For FPIs, the relevant provisions are set out under the special tax framework for foreign investors. Under the current rules, eligible long-term gains from listed equity covered by Section 112A are taxed at 12.5% above the Rs 1.25 lakh threshold.
Other securities can have different tax treatment depending on the instrument and applicable provisions.The proposal to scrap LTCG tax for foreign investors would therefore be a significant change. It would reduce the tax burden on eligible long-term equity gains and potentially improve the post-tax returns that overseas funds earn from Indian investments.The proposal for domestic mutual funds is different.
It seeks to make switching between schemes tax-neutral after the prescribed holding period, rather than remove LTCG tax on all domestic equity investments.WHY IS THE TAX DEBATE IMPORTANT FOR THE MARKET?The tax debate has gained importance because foreign investors have been withdrawing money from Indian equities, while competing markets have attracted greater interest.Removing LTCG tax could improve India's competitiveness and make its equity market more attractive to foreign funds. However, it is unlikely to be the only factor determining whether overseas investors return.Currency movements, US bond yields, crude oil prices, corporate earnings and relative valuations continue to influence foreign investment decisions.
A tax cut may improve returns after tax, but investors will still look at the overall return they can generate in dollar terms.Sitharaman's comments are important because they show that the government is willing to listen to the concerns being raised by market participants. But any change will require a policy decision, and investors should not treat the Sebi recommendation as an assured tax benefit.DIIs SELL AS FIIs BUY: A NEW MARKET DYNAMIC?Another interesting feature of the recent rally is the divergence between foreign and domestic institutional flows.On November 3, while FIIs bought equities worth Rs 6,836.81 crore, DIIs were net sellers to the tune of Rs 3,678.85 crore.
This was the third consecutive session of DII net selling, according to Deepesh Sarawagi, Technical Research Analyst at Choice Broking.On November 2, DIIs had also sold shares worth Rs 392.20 crore, even as FIIs bought Rs 3,114.68 crore.Sarawagi said foreign investors strengthened their buying activity for the third consecutive session on November 3, while domestic institutions extended their selling streak."The market structure remains positive but slightly stretched after the recent sharp advance. Strong FII inflows continue to support sentiment, although Bank Nifty's inability to clear its moving-average hurdles and the possibility of profit booking in Nifty warrant some caution.
Traders may look for fresh buying confirmation before expecting another sustained upward leg," he said.The divergence suggests that foreign buying has become a key source of support for the latest rally. However, DII selling should not automatically be interpreted as a loss of confidence in Indian equities, as institutional flows can also reflect profit-booking, redemptions and portfolio rebalancing.CAN THE MARKET RALLY SUSTAIN?The recent recovery has changed the near-term market mood, but sustaining the gains will depend on whether foreign buying continues.Vijayakumar believes the rally could be strong and sustainable because large-cap stocks have room to attract fresh foreign flows and short covering could add to the momentum.
He also sees potential for leading financial stocks to move higher.Sarawagi, however, has advised some caution after the sharp advance, pointing to technical hurdles in Bank Nifty and the possibility of profit-booking in the Nifty.The US midterm election outcome, global bond yields, crude oil prices and geopolitical developments will also remain important triggers for Indian equities.For now, the biggest change on Dalal Street is visible in the flow of money. After months of foreign selling, FIIs are returning as buyers, and their purchases have coincided with a sharp recovery in benchmark indices.
Whether this marks the beginning of a sustained reversal in foreign investor sentiment will depend on how consistently the buying continues in the coming weeks.- Ends