Indian Rupee weakens after FM Sitharaman hikes Capital Gains tax

• The Indian Rupee weakens against the US Dollar after the announcement of the Indian Fiscal Budget 2024-25.
• Indian government raises capital gains taxes with immediate effect.
• This week, the US Dollar will be influenced by a slew of US economic data.

The Indian Rupee weakens to near 83.70 against the US Dollar (USD) in Tuesday’s European session. The Indian currency faces pressure due to a sharp sell-off in equity markets after the announcement of the Fiscal Budget 2024-25.

Indian Finance Minister Nirmala Sitharaman proposed to hike taxes on Long-term Capital Gains (LTCG) and Short-term Capital Gains (STCG) with immediate effect. The centre has raised taxes on LTCG and STCG from 10% to 12.5% and from 15% to 20%, respectively. While the exemption limit on LTCG has been raised to Rs. 1.25 lakhs from Rs. 1 lakh.

Higher taxes on capital gains are an unfavorable scenario for foreign investors who are keen to invest in India through direct investment or institutional routes. This could have a negative impact on the Indian rupee in near-term.

However, the long-term appeal of the Indian Rupee could strengthen as the administration has reduced fiscal deficit targets for 2024-25 and 2025-26 to 4.9% and 4.5%, respectively.

Meanwhile, the US Dollar exhibits a subdued performance with a focus on a slew of United States (US) economic data, releasing this week. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades around 104.30.

The major trigger for the US Dollar will be the core Personal Consumption Expenditure Price Index (PCE) data for June. The core PCE inflation is a Federal Reserve’s (Fed) preferred inflation tool, which provides cues about when the central bank will start reducing interest rates. Currently, financial markets expect the Fed to begin lowering interest rates from the September meeting.