Every evening, financial television delivers a familiar verdict. Foreign institutional investors (FIIs) bought today, so the market is strong. They sold, so investors should worry. It has become a daily ritual, and like most rituals it is rarely questioned.

Lately the conversation has acquired a new twist. Market talk suggests the government may soon ease the long-term capital gains (LTCG) Tax burden on foreign investors, and that expectation is widely believed to be one reason foreign buying has revived in recent weeks. In other words, investors seem to be pricing in a policy gift before it has been announced. That raises a question worth asking calmly: can tax relief alone bring foreign money back on a sustained basis?

Tax policy matters, but the historical evidence suggests that earnings, valuations and the relative appeal of other markets have far more say over how much foreign money arrives and in which direction it moves. Over the next few paragraphs, a handful of charts and tables make the case.

Foreign money has never followed a straight line

Start with the record. India received about US$7.8 billion of net foreign equity inflows in 2017, then suffered outflows of US$4.4 billion in 2018. Inflows came roaring back at US$14.4 billion in 2019 and US$23.0 billion in 2020. Then the tide turned again: outflows of US$16.5 billion in 2022, inflows of US$20.7 billion in 2023 and outflows of US$18.9 billion in 2025. Reversals of this size cannot plausibly be explained by a single tax rate.

Chart 1 | Calendar-year foreign portfolio equity flows; US$ billion. Source: NSE Market Pulse (January 2026), Figure 202; NSDL and NSE EPR.

Notice, too, how deceptive a single annual number can be. 2024 shows a net flow of just US$0.1 billion, which looks like a quiet year. It was anything but. As we will see below, that year contained months of heavy buying and months of much heavier selling, and they almost cancelled out. A flat total can hide a very bumpy ride.

The chart is better read as a record of global mood than of Indian tax law. When liquidity is plentiful and growth looks scarce elsewhere, money flows towards emerging markets. When the dollar strengthens and safer returns appear at home, it flows back out. India, as a large and liquid market, feels both tides.

Valuations matter, but only alongside corporate earnings

The Nifty 50 median trailing P/E was roughly 24.8 times in 2017, 26.3 times in 2018 and 27.7 times in 2019. Foreign money nevertheless returned in 2019. The 2020 episode is even more striking. Implied index earnings fell during the pandemic, and the year-end P/E jumped to about 38.5 times, yet global liquidity and hopes of a recovery still drew significant foreign inflows. The lesson is that high valuations do not guarantee selling, just as low valuations do not guarantee buying.

Chart 2 | Calendar-year median trailing Nifty P/E. Note: NSE changed from standalone to consolidated index earnings in March 2021, so the 2021 median mixes bases and cross-period comparisons require caution. Source: NSE-derived historical daily P/E series.

Put flows and valuations side by side and the lack of a simple relationship becomes obvious. In 2022, the median P/E was about 21.3 times and foreign investors sold US$16.5 billion. In 2023, it was almost the same at 21.7 times, yet they bought US$20.7 billion. Likewise, the market was dearer in 2018 (26.3 times) when money left, than in 2019 (27.7 times) when it poured in. If valuation alone were the trigger, those years would have behaved very differently.

Chart 3 | FPI equity flows (bars, left axis) against calendar-year median trailing Nifty P/E (line, right axis). The 2021 P/E is on a different earnings basis. Source: table at the end of this note.

The other half of the valuation equation is earnings. On an implied year-end trailing EPS basis, Nifty earnings growth was around 12.9% in 2023, 15.7% in 2024 and just 5.8% in 2025. Yet the median Nifty P/E stayed close to 22 times throughout. The price investors were willing to pay for each rupee of profit barely moved, even as the growth in those profits shrank by more than half.

Chart 4 | Approximate year-on-year index EPS growth derived from year-end Nifty level divided by year-end trailing P/E. 2021 is excluded because NSE’s methodology switch makes it non-comparable. This is not a directly published uniform earnings series.

That is the quiet squeeze that global portfolio managers worry about. A market delivering mid-teens profit growth can justify a very different valuation from one delivering mid-single-digit growth. If the multiple holds while growth fades, the market needs ever more optimism to justify the same price. Sooner or later, a fund manager asks whether that money would be better used elsewhere.

The emerging-market premium is the missing link

Foreign investors do not judge India in isolation. They compare it with the entire emerging-market opportunity set. A forward P/E of 20 times for India against 13 times for MSCI Emerging Markets implies a premium of roughly 54%.

Think of a buyer choosing between two similar shops, one charging more than half as much again for comparable goods. The dearer shop can justify its price if its products are better and likely to improve faster, and India has historically made that case through stronger expected earnings growth, corporate quality and long-term prospects. But the justification is not unconditional. If the premium stays high while earnings expectations moderate, portfolio managers have a powerful reason to review their India allocation, whatever the domestic LTCG rate happens to be.

The 2018 LTCG reintroduction did not stop later inflows

The 2018 Budget reintroduced a 10% LTCG tax on qualifying listed-equity gains above ₹1 lakh, with grandfathering provisions. Foreign inflows were weak around 2018. A tax sceptic would stop there and blame the levy. But the same 10% rate remained in place when foreign investors returned in 2019 and invested heavily in 2020.

This does not prove that the tax had zero impact. It shows something more modest and more useful: a tax burden did not prevent enormous flows once global circumstances turned favourable. The tax was a constant in a story where almost everything else changed.

The 2024 LTCG increase is an even clearer test

On 23 July 2024, the specified listed-equity LTCG rate rose from 10% to 12.5%, with the exemption limit lifted to ₹1.25 lakh. If tax were the main driver, one would expect foreign investors to retreat. NSDL data show something different: net equity buying of ₹32,365 crore in July, ₹7,320 crore in August and ₹57,724 crore in September. July spans the policy change and cannot be treated as a clean post-announcement response, but August and September were unambiguously positive.

Chart 5 | FPI equity flows, ₹ crore. Source: RBI Table 181, NSDL. Policy date: Ministry of Finance, 23 July 2024. Monthly flows alone cannot isolate the causal effect of a tax change.

Then the picture flipped. FIIs withdrew ₹94,017 crore in October and ₹21,612 crore in November. The LTCG rate had not changed again. Competing investment opportunities, China-related optimism, valuation concerns and shifting global risk appetite offer more plausible explanations for the abrupt reversal than tax policy alone.

Table 1 | Monthly net FPI equity flows after the July 2024 LTCG increase. Source: NSDL; Ministry of Finance for the policy date.

The point is not that LTCG is irrelevant. It is that it is insufficient as a stand-alone explanation. Within a single month, foreign investors went from ₹57,724 crore of buying to ₹94,017 crore of selling with no change in the tax rate at all.

Domestic capital has become a powerful counterweight

There is another reason to treat the daily FII number with caution: Indian equities no longer depend on foreign money the way they once did. The rise of domestic Mutual Funds, pension funds and insurance companies has altered the structure of the market. NSE reported approximately ₹8.5 lakh crore of net domestic institutional equity buying in FY2025–26, even as foreign investors withdrew substantial sums.

Domestic inflows do not immunise prices from global shocks, and the two sets of figures cover different periods and should not be netted against each other. What they do is make the daily FII number a less complete description of Indian equity demand than it once was. When household savings arrive every month through systematic investment plans, foreign selling is absorbed rather than amplified, and that gives the market a floor it did not have a decade ago.

November 2026: recent buying does not erase the full-year picture

Now to the present. The provisional cash-market series shows FIIs net bought ₹12,563 crore on 11 November 2026, taking November buying through that date to approximately ₹65,735 crore. Welcome as that is, the same provisional series still showed about ₹3.82 lakh crore of net selling for calendar 2026 to that date. By our simple arithmetic on that series, the year’s net selling stood at roughly ₹4.5 lakh crore before November began, so the month’s buying has repaired only a small part of the damage.

A caution on method: these exchange cash-market figures must not be mechanically added to, or equated with, settled NSDL investment totals. They are different measures, and the provisional numbers may be revised. A strong fortnight, in short, is a good start but not a trend.

Would removing LTCG help? Yes, but it is no panacea

Lower LTCG can improve after-tax returns and may lift market sentiment. A government willing to ease the burden also signals that it wants foreign capital, which is no small thing. Yet foreign funds face differing effective tax treatments depending on treaty eligibility, legal structure and applicable exemptions, so the benefit will not reach every investor equally.

Above all, a tax cut cannot by itself repair weak earnings, compress India’s premium to competing markets, weaken the US dollar or reverse global risk aversion. It is best thought of as a tailwind, not an engine. Tailwinds help a ship that is already moving, but they do not move one that is stalled.

India’s durable advantage is not that investors can exit cheaply. It is that businesses here can produce compelling, sustainable, risk-adjusted earnings growth at a sensible entry price. That is a far stronger foundation for international capital allocation than the hope of a single Budget announcement.

The decade at a glance

The table below brings the key series together. Three observations stand out. First, inflows and outflows appear at both high and low valuations: money came in at 27.7 times in 2019 and at 21.7 times in 2023, and left at 26.3 times in 2018 and 21.3 times in 2022. Second, the strongest year for flows, 2020, coincided with the weakest implied earnings growth in the table (−15.4%). Third, in each of the last four years earnings growth was positive, yet foreign flows swung between heavy buying and heavy selling, with 2024 netting out to roughly zero. Earnings are essential, but global conditions decide the timing.

Table 2 | Decade-long evidence. *N/C: not comparable across NSE’s earnings methodology change. Flow series uses calendar-year NSDL/NSE reporting; Nifty P/E medians use daily trailing readings; EPS growth is an implied calculation, not a uniformly restated published series.

What this means for you

Do not trade the tax headline. A possible LTCG cut may help sentiment for a while, but past episodes show that flows can reverse long before a tax change is digested.

Follow earnings growth. With valuations roughly steady near 22 times, the pace of profit growth is what will decide whether that multiple is defended.

Respect the premium. India’s valuation advantage over other emerging markets is justified only while stronger growth is delivered, so favour businesses that can deliver it.

Judge flows over quarters, not days. Look at foreign and domestic flows together, and treat one strong day as news and not as a verdict.

None of this means foreign investors are irrelevant. They move prices, shape sentiment and influence which sectors are in favour. But they respond to the same things you should be watching: earnings, valuations and relative opportunity. Good businesses, bought at sensible prices and held with patience, remain the most reliable way to build wealth, whatever the Finance Minister announces next.