SBI Research seeks LTCG tax waiver to stem rupee slide, increase capital inflows

Abolishing long-term capital gains (LTCG) tax on equities after extending the holding period to two to three years, clarifying tax rules for overseas borrowing, and bringing export earnings back to India within six months are among the measures proposed by SBI Research to attract more stable capital inflows and ease pressure on the rupee.

In its Ecowrap report dated October 12, 2026, titled “RBI Unveils a Bazooka: Rupee Likely to Test 94.50 Levels in Short Term”, SBI Research argues that the Reserve Bank of India (RBI) can do only so much to support the currency through market intervention. Longer-term government action is needed to improve India's appeal to foreign investors and address structural weaknesses in capital flows.

The recommendations come as India faces foreign portfolio investor (FPI) outflows, rising crude oil prices, and elevated US bond yields, which can increase demand for dollars, complicate inflation management, and make financing conditions more challenging for Indian businesses.

Need for LTCG tax reform

SBI Research has called for the government to extend the equity holding period to two to three years and abolish LTCG tax on equity investments under the proposed longer-term framework. It argues that lower taxation for investors willing to commit capital for a reasonable period could encourage more durable inflows.

The report estimates that equity outflows by FPIs reached Rs 3.51 lakh crore between 2021 and September 2026. It identifies outflows exceeding Rs 2.61 lakh crore in 2026 alone, in addition to RS 1.66 lakh crore in 2025, and cites around USD 13 billion in equity outflows in FY27.

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SBI Research argues that attracting capital requires a more competitive tax framework, particularly when global investors have alternatives in markets benefiting from strong technology-led investment and attractive returns.

The proposal is not an announced government decision. Its potential benefits would need to be weighed against revenue implications and the possibility that a longer holding-period requirement could change investor behaviour.

Clearer ECB tax rules sought

The report has also called for greater clarity on withholding tax applicable to external commercial borrowings (ECBs), citing prevailing rates of 5–20 per cent, with potentially lower rates for International Financial Services Centre (IFSC) listings.

It recommends clearer application of benefits under Double Taxation Avoidance Agreements (DTAAs) and more predictable interpretation of general and specific tax provisions.

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For Indian companies raising funds overseas, uncertainty over tax treatment can complicate financing decisions and increase compliance burdens. Greater clarity could improve confidence among international lenders and investors without requiring a broader change to the borrowing framework.

Export proceeds’ repatriation

SBI Research has proposed making six months the normal period for bringing export proceeds back to India, with extensions granted on a case-by-case basis rather than routinely.

The report notes that exporters often operate with credit periods of around six months. Its recommendation seeks to preserve flexibility for genuine commercial needs while discouraging unnecessary delays in repatriating foreign-exchange earnings.

For India, timely repatriation could improve the availability of dollars in the domestic market. The report also argues that exporters should align proceeds and remittances more closely with importers' requirements and hedging needs.

RBI’s measures to support rupee

The report describes a series of RBI measures, including a direct dollar-supply window for three state-run oil marketing companies — Indian Oil Corporation, Hindustan Petroleum Corporation, and Bharat Petroleum Corporation — to meet their dollar requirements. SBI Research estimates that this could shift roughly USD 10–12 billion a month away from the open spot market.

The RBI has also raised the daily cash reserve ratio (CRR) maintenance requirement for scheduled banks from 90 to 99 per cent of the prescribed requirement, effective from the reporting fortnight beginning October 16, 2026. The average requirement over the 15-day period remains 100 per cent.

In addition, the RBI announced an open-market sale of government securities worth Rs 25,000 crore, and introduced a Foreign Exchange Risk Reserve requirement for eligible rupee-linked derivative transactions exceeding USD 2 million. The report estimates that this reserve requirement could involve around Rs 80,000 crore against fresh contracts if the assumed monthly transaction volumes persist.

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The RBI has also restricted the rebooking of cancelled rupee-linked foreign-exchange derivative contracts and reduced the currency derivative position limit discussed in the report from USD 100 million to USD 5 million.

These measures aim to curb speculative pressure and manage dollar demand. However, tighter liquidity can reduce banks' flexibility in daily fund management and may affect short-term borrowing costs.

SBI Research has separately advocated widening the liquidity adjustment facility corridor and says a larger rate increase, potentially 50 basis points, could be warranted. These are the research team's recommendations, not confirmation of a further RBI rate decision.

Oil prices, US yields add to risks

SBI Research's model forecasts Brent crude rising from approximately USD 103.40 to USD 110 per barrel and the Indian crude basket from around USD 127 to USD 130 over the next 10 trading days.

Higher oil prices can raise India's import bill, increase dollar demand, and put further pressure on the rupee. They can also add to transportation costs and inflation, affecting households and businesses.

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The report expects US Treasury yields to remain firm, with a modest upward bias in 10–30-year yields over the next three to six months. Its October 9 yield observations show the US 10-year Treasury at 5.24 per cent and the 30-year yield at 5.60 per cent.

Higher US yields can divert international investment towards dollar assets and away from emerging markets, potentially intensifying capital outflows.

Capital inflows remain crucial

SBI Research estimates India's required foreign-exchange reserves at USD 596 billion, compared with actual reserves of USD 604.75 billion excluding gold. Including the stated bilateral swap arrangement with the Bank of Japan, effective reserves rise to USD 679.75 billion, and to USD 786.15 billion including gold.

The report says reserves remain adequate even under stressed scenarios, while estimating India's FY27 balance-of-payments surplus at around USD 55–60 billion, which it describes as increasingly thin.

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The central message is that foreign-exchange reserves and RBI intervention provide a buffer, but cannot substitute for sustained capital inflows. SBI Research argues that predictable taxation, clearer overseas borrowing rules, and timely export proceeds repatriation should complement central-bank action to strengthen India's external stability.