LTCG tax relief alone unlikely to revive FPI inflows, Bernstein warns

Bernstein Research has sounded a note of caution on the market impact of any long-term capital gains (LTCG) tax cut, suggesting that investor euphoria may be short-lived and could actually be leveraged by foreign portfolio investors (FPIs) to reduce their Indian equity holdings.

In a note dated October 19, the research firm outlined its view that while an LTCG tax reduction might spark a sharp one to two-day rally in equities, such a bounce could prove opportune for portfolio rebalancing rather than genuine return of capital flows.

The cautionary stance reflects broader concerns about FPI sentiment toward Indian markets. Foreign investors have remained net sellers for much of the current year, prompted by elevated valuations, domestic economic headwinds, and attractive opportunities in other emerging markets offering better risk-reward propositions.

Alongside its commentary on tax policy, Bernstein also revised downward its target for the Nifty 50 index to 25,000, signaling a more measured outlook on near-term market performance. This revision underscores the firm's view that structural challenges facing the Indian market extend beyond fiscal policy interventions.

Market participants will be closely watching whether policymakers introduce LTCG tax amendments in the coming months and how foreign investors respond to any such changes, given the critical role of FPI flows in supporting domestic equity valuations.