Foreign Portfolio Investors Withdraw from Indian Equities in April 2024
Foreign portfolio investors (FPIs) pulled out a net of Rs 8,671 crore from Indian equities in April 2024, following concerns over changes in the tax treaty between India and Mauritius. This outflow came after a significant inflow of Rs 35,098 crore in March and Rs 1,539 crore in February.
The revised tax treaty includes a Principal Purpose Test (PPT), which limits treaty benefits if obtaining those benefits is the primary purpose of a transaction. This is expected to impact investors and traders from Mauritius, including Indian HNIs who use the Mauritius route for tax avoidance.
Adjustment after heavy inflow in March: The outflow in April could be seen as an adjustment after the significant inflow in the previous month.
Some investors may have sold their holdings in anticipation of a rate cut.
Investors may be waiting for the outcome of the upcoming elections before making further investments.
Uncertain macro and interest rate outlook in global markets have also contributed to the outflow.
The rise in US bond yields has made them more attractive to foreign investors, leading to a withdrawal from emerging markets like India.
The DTAA has been a significant factor in attracting foreign investments into India via Mauritius. As of March 2024, Mauritius was the fourth largest contributor to FPI in India. However, the revised treaty is expected to impact future investments from Mauritius.
The Income Tax department has clarified that the concerns regarding the revised treaty are premature as the protocol is yet to be ratified and notified. However, tax experts believe that the PPT will give Indian tax authorities the ability to deny treaty benefits if they suspect tax avoidance.
The revised treaty is expected to come into effect from April 1, 2025.