Ahead of Union Budget 2026, former RBI governor Duvvuri Subbarao has raised concerns about capital outflows. In an open letter on Times of India, Subbarao has written to the Finance Minister Nirmala Sitharaman that “One early warning signal you should not ignore is capital outflows.”
In his letter he pointed out that “Foreign investors have been taking money out of India, driven by both push and pull factors. Higher interest rates in advanced economies and the allure of investment in AI are pulling capital away.”
What’s driving the capital outflow?
Foreign investors have been net sellers in India for two consecutive years . In 2024 as well as 2025, FIIs net sold equities worth over Rs 3 lakh crore. Even so far in 2026, FIIs remain net sellers. In fact India has seen the largest outflow in 2026 so far amid the EM basket.
Subbarao said that India is pushing investors because of its own policy choices like Capital gains tax and Withholding tax.
“Repeated tinkering with capital gains taxation, combined with a complex and often unpredictable withholding tax regime, has eroded policy credibility,” he wrote.He stressed that investors value clarity and stability as much as returns.
Subbarao’s call to simplify capital gains and withholding tax
Subbarao urged the government to rethink capital gains tax and withholding tax rules, not to offer concessions but to restore simplicity and predictability.
“If India wants stable, long-term capital rather than volatile flows, it may be time to rethink both capital gains and withholding taxes,” he said.
Capital gains tax is charged when one sellscapital asset such as stocks, property or mutual funds at a rate higher than its purchase cost.
Currently, For listed equity shares and equity-oriented mutual funds, short-term capital gains arising from holdings of 12 months or less are taxed at a flat 20%, provided Securities Transaction Tax (STT) has been paid.
Long-term capital gains, where the holding period exceeds 12 months, are taxed at 12.5% on gains exceeding Rs 1.25 lakh in a financial year, again subject to STT being paid.
Withholding tax is tax deducted at source on income such as dividends, interest or royalties, especially in the case of foreign investors.
Withholding tax is currently generally 20% under domestic tax law, with applicable surcharge and 4% health and education cess.
Revenue deficit remains the true test of fiscal discipline: Subbarao
On fiscal policy, Subbarao supported the government’s move to shift the policy anchor from fiscal deficit to debt-to-GDP ratio, calling it “conceptually sound”.
However, he warned that the revenue deficit has fallen off the radar and should not be ignored.
“A government that borrows to invest is very different from one that borrows to consume,” he wrote, adding that reducing revenue deficit remains the most credible signal of fiscal responsibility and intergenerational equity.
High tariffs clash with India’s global integration goals
The former RBI governor noted that India is currently in a relatively comfortable macroeconomic position, with growth above 7%, low inflation, manageable external deficits and healthier bank and corporate balance sheets.
However, he flagged concerns about the quality of growth. Productivity growth remains weak, private investment is sluggish and employment generation, especially for the youth, continues to disappoint.
He also said manufacturing has failed to emerge as a labour-absorbing engine, while high and rising tariffs sit uneasily with India’s goal of integrating into global value chains.
Subbarao push for medium-term fiscal and growth strategy
The former RBI governor suggested that the Finance Minister announce a medium-term fiscal and growth strategy aligned with Viksit Bharat.
Such a framework, he said, would bring coherence and discipline to successive budgets and allow citizens to hold the government accountable for progress on long-term goals rather than one-off announcements.
He concluded the letter taking cognizance of the current economic challenges for India. “I recognise the tough fiscal and political constraints under which you operate. You have the unenviable task of making hard choices to secure the economy’s long-term sustainability even if that entails short-term costs.” and added that “is precisely why we elect leaders – to make difficult choices.”