India Should Discourage Excessive Investments in Equities

In the first piece I wrote for BasisPoint on April 30, 2026, I had said that the Reserve Bank of India will try its best to defend the rupee against the US dollar. This, despite many economists and professional policy wallahs suggesting that the rupee should be allowed to fall and find its own level.

The Indian central bank’s strategy has become very clear since. The central government has chipped in too. The idea has largely been to encourage the supply of dollars, shore up foreign exchange reserves and thus defend the rupee.

Along with this comes the news that the United States and Iran have signed a memorandum of understanding to end the war in West Asia.

This has led to a sharp fall in crude oil prices. India imports close to 90% of the oil that it consumes. Further, The Indian Express recently reported that urea prices have also fallen considerably.

If peace returns to West Asia, prices of other commodities linked to oil will fall as well, helping lower the demand for dollars and thus placing less pressure on the rupee.

Now, this is good news for the Indian economy. But there is one major area that has sucked up a lot of dollars over the years and where nothing seems to have been done. Take a look at the following chart, which plots the repatriation of foreign direct investment.

Source: Reserve Bank of India.

FDI repatriation has risen sharply over the years. Foreign investors can acquire significant ownership stakes in Indian companies through the FDI route, allowing them to participate in management and influence business decisions.

FDI repatriation refers to a foreign investor transferring money earned from an FDI investment back to its home country.

A significant portion of this repatriation has been carried out by venture capitalists and private equity firms cashing out their holdings in loss-making startups when these companies listed on Indian stock exchanges at extremely lofty valuations. There has also been post-listing selling through block deals.

Further, some multinational companies have chosen to list their Indian subsidiaries in the Indian stock market.

Money that comes into the country to be invested in firms through the FDI route has to be allowed to exit. That is a no-brainer, really.

Nonetheless, this exit option has ended up creating problems for the Indian economy.

When such exits happen, investors and firms selling their shares are paid in Indian rupees. These rupees then need to be converted into dollars or other foreign currencies so that they can be repatriated out of India. This puts pressure on the rupee.

Now, there is a very important point that arises here: how have so many loss-making startups managed to sell their shares through an IPO at such massive valuations?

The simple answer is that the prevailing zeitgeist – the spirit of the times – allowed them to do that. Over the last few years, retail and other investors have been gung ho about investing in stocks – directly and indirectly. 

But there’s more to it than that. Existing regulations allow firms to sell a small proportion of their equity through an IPO and list on a stock exchange. 

In an environment where demand for stocks was huge, this allowed investment bankers managing such IPOs to price them at extremely high levels, with almost no link to the often non-existent earnings of such firms. 

This allowed VCs and private equity investors to cash out of loss-making or barely profitable startups at valuations that would have been difficult to justify under normal market conditions. This eventually showed up in the rising repatriation figures, adding to pressure on the rupee.

The idea seems to be to let reasonably large firms list by selling a small stake through their IPOs. This is something that the Securities and Exchange Board of India needs to seriously relook at because its side-effects are hurting the country. Maybe insisting on a higher minimum public offering is one way out.

Hidden Cost
There is another point that arises here. But let me first take a small detour. 

India produces almost no gold that it consumes. It imports all of it and has to pay for it in dollars. In 2025-26, total gold imports stood at $72 billion, more than double the $35 billion imported in 2022-23. This fascination for gold creates demand for dollars and puts pressure on the rupee.

Lately, gold buying has been disincentivised through moral suasion and higher customs duties. Mutual funds have also been restricting investments into gold funds.

Along similar lines, excessive investments into equity mutual funds and stocks should be disincentivised too. 

According to the Economic Survey, the share of stocks and mutual funds in annual household financial savings has risen sharply from around 2% in 2011-12 to more than 15.2% in 2024-25. The proportion is likely to have increased further since then.

The net inflows into equity MFs in 2024-25 and 2025-26 stood at ₹7.64 trillion. This is a huge jump compared with previous years.

Indeed, one might argue that gold is largely a useless asset and equity isn’t. The trouble is that the argument weakens significantly when a lot of buying of stocks is just providing extremely overvalued exits to insiders like VCs and promoters.

It can be further argued that this is a natural consequence of the increasing financialisation of the Indian economy. Nonetheless, it has ended up creating multiple problems.

First, there is no selling without buying. The constant inflow of money into equity MFs through SIPs and other routes has financed the huge selling of Indian stocks by foreign institutional investors.

It has also allowed investment bankers to price IPOs at atrocious levels and get away with it. In that sense, you and I have been financing these exits.

My concern is not equity investing per se, but equity investing that enables foreign exits at inflated IPO valuations, which in turn weaken the rupee. That has all kinds of repercussions, from weakening the rupee to fueling inflation to increasing the government’s fiscal deficit, along with a significant number of second and third order effects that are difficult to forecast. 

Second, this has created a problem for banks. Many people argue that when household savings move towards stocks and equity mutual funds, not enough savings are invested in bank deposits.

This argument is wrong. When an investor buys a stock, someone has to sell it. So the money moves from one bank account to another.

Nonetheless, there is still a problem simply because household savings in banks tend to be held for longer maturities than other kinds of savings. Lower household savings in bank deposits therefore create an asset-liability mismatch for banks. Bankers and regulators have already highlighted this.

Thus, excess money being invested into stocks and equity MFs needs to be disincentivised.

One way is to tax all kinds of income at the same rate. Capital gains from the sale of shares or equity mutual funds should be taxed at the same rate as gains from debt mutual funds, interest earned on fixed and other deposits, or gains made from selling gold and real estate.

This will create a level playing field across asset classes and ensure that tax considerations do not disproportionately influence investment choices.

Of course, saying that India should discourage excessive investment in stocks and equity mutual funds is a great way to become unpopular.

In a country where every market correction is a "buying opportunity" and every IPO is "wealth creation", this may sound like heresy.

But if buying gold can be portrayed as unpatriotic because it hurts the rupee, perhaps buying IPOs and investing in SIPs without restraint deserves a similar hard look. And I say this as someone who has largely been an SIP investor for more than 20 years.