With the Union Budget just around the corner, the government finds itself in a delicate position. On the one hand, secondary markets have struggled, but the causes are largely external—most notably US tariff actions—rather than a verdict on India’s underlying growth story. If trade tensions ease, some normalisation is likely. On the other hand, the sustained flight of foreign portfolio capital is a more immediate concern. Foreign portfolio investors (FPIs) have pulled out Rs 1.65 lakh crore in 2025, a scale of selling that cannot be brushed aside. In 2026, the selling spree—at Rs 18,000 crore—has continued till date. While several brokerages expect the Sensex and Nifty to be meaningfully higher by December 2026, the opening weeks of the year have done little to inspire confidence in those projections. Coming on the heels of a tepid 2025, secondary market investors have little to celebrate. Benchmark indices returned around 10%, but the broader market fared worse. Mid- and small-cap stocks were flat to negative, vindicating earlier warnings by fund managers such as ICICI Prudential’s Sankaran Naren about valuation excesses in these segments.
Great Divergence
The primary market, however, told a very different story. More than 100 initial public offerings (IPOs) raised a record Rs 1.8 lakh crore in 2025. While listing gains became harder to come by, marquee names such as LG Electronics and Meesho—delivering first-day gains of about 50% and 45%—were enough to keep retail interest alive. That momentum is unlikely to fade soon. With large listings such as Jio and NSE expected in 2026, the IPO pipeline looks even stronger. Unless valuations become egregious or markets suffer a sharp correction, investor appetite for quality paper should remain intact. Against this backdrop, the most sensible course for the government may be to do very little for equity investors. At the same time, the current tax rates of 12.5% and 20% on long-term and short-term capital gains seem to be tough enough.
Stability, rather than stimulus, is what markets need. There may be a limited case for fine-tuning certain provisions to improve India’s appeal to FPIs. As Financial Express reported recently, discussions are underway on extending pass-through tax treatment to pension and endowment funds that are tax-exempt in their home jurisdictions. The perennial demand to cut the securities transaction tax and commodities transaction tax has also resurfaced, a move that would please exchanges and market participants alike. Yet, given the revenue implications—and after sweeping changes to income tax slabs and the rollout of goods and services tax 2.0 that lowered rates across segments—it is unlikely the government will be eager to give up more fiscal room.
Where policy intervention could be more constructive is in deepening the bond market.
Bond Market Depth
Both the Securities and Exchange Board of India and the Reserve Bank of India have taken steps to widen retail access to bonds, supported by the growth of online bond platforms. The government could reinforce these efforts by reviving Section 194LD, which lapsed in mid-2023 and allowed FPIs and qualified institutional investors a concessional 5% tax deducted at source on certain debt investments. Other demands—such as equalising tax treatment between debt and equity funds or offering tax holidays to FPIs—remain largely aspirational wish lists. For equity markets, however, the case for restraint is strong. Maintaining the status quo would send the right signal. In uncertain global conditions, nothing reassures investors more than a stable and predictable tax regime. As they say, if it ain’t broke, don’t fix it.