SBI Research suggests tax reforms to support rupee, attract inflows

SBI Research recommends tax reforms like abolishing equity LTCG and clarifying ECB rules to attract foreign capital. It also suggests faster repatriation of export proceeds, stating government measures are vital as RBI's support for the rupee is limited.

SBI Research has called for changes in equity taxation, greater clarity on tax rules for external commercial borrowings (ECBs) and faster repatriation of export proceeds to attract foreign capital inflows, saying the Reserve Bank of India's measures to support the rupee have limits.

Key Recommendations for Capital Inflows

In its latest report, SBI Research suggested encouraging longer-term equity investments by considering a holding period of two to three years alongside the removal of long-term capital gains tax on equity. It said such measures could help attract incremental inflows amid sustained foreign investor withdrawals. “The Government must seriously look into anchoring hot money flows into equity segment by extending the holding period to say 2-3 years and abolishing the long term capital gains tax for equity,” the report said.

Clarity on ECB Tax Rules

The report also called for greater clarity on withholding tax applicable to ECBs, currently in the range of 5-20 per cent. It said clearer rules, including on the application of tax provisions and benefits under the Double Taxation Avoidance Agreement (DTAA), could help improve investor confidence.

Faster Repatriation of Export Proceeds

SBI Research further recommended bringing export earnings back to India within six months, allowing extensions in genuine cases. The report said this would accommodate genuine business requirements while preventing unnecessary delays in bringing foreign exchange earnings back into the country.

“Long term structural measures by Government is a sine qua non for a pick up in capital inflows as RBI can only do till a limit,” the report said.

Urgency Driven by Sustained Outflows

SBI Research noted that foreign portfolio investors had withdrawn Rs 3.51 lakh crore from the equity segment between 2021 and September 2026, including outflows of more than Rs 2.61 lakh crore in 2026 alone. It also flagged around USD 13 billion in equity outflows in FY27.

The report said these trends highlighted the need to improve conditions for foreign investment, rather than relying only on central bank intervention to support the rupee.

Existing RBI Measures to Support Rupee

The RBI has introduced measures to support the rupee, including a direct dollar-supply window for three state-run oil marketing companies, raising the daily CRR maintenance requirement for banks to 99 per cent from 90 per cent, and an open market sale of government securities worth Rs 25,000 crore. Other steps include a Foreign Exchange Risk Reserve requirement for certain large currency derivative transactions, a cap on currency derivative positions and restrictions on corporates rebooking cancelled forward contracts.

External Pressures and Economic Forecast

SBI Research estimated that the dollar window would shift around USD 10-12 billion per month away from the open spot market. External pressures could also persist, with the report forecasting Brent crude prices to rise from around USD 103.4 per barrel to USD 110 over the next 10 trading days.

It estimated India's balance of payments surplus could narrow to around USD 55-60 billion in FY27, reinforcing the need to strengthen capital inflows. (ANI)

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