“I think we need to first list down what are the issues, what are the leakages, what are the things moving the currency out, and then try to address if it is addressable,” Mehta said.
Mehta pointed to the sharp pace of equity outflows as a particular concern. He said around ₹53,000 crore had flowed out of Indian equities in just 10 days, despite the country’s growth and broader macroeconomic indicators remaining strong. He questioned why investors were pulling money out when India’s macro picture was, in his view, among its strongest.
The DSP Finance CEO said regulators should also examine other possible sources of capital leakage, including derivatives and algorithmic trading profits. He said the regulator can use data from custodians to understand both gross inflows and outflows and determine what is driving the movement of money.
Another area that needs attention is the remaining linkage between India’s onshore and offshore currency markets. While banks’ onshore-offshore operations were restricted in March, Mehta said corporate linkages remain.
“If you are trying to lock the door, you have to make sure windows are shut,” he said, arguing that remaining linkages need to be evaluated and potentially tightened.
Mehta also pushed back against the argument that India’s lack of artificial intelligence (AI) investment is the main reason for the dollar outflows. He called the explanation “overblown” and said policymakers should look beyond a single factor to understand the pressure on the rupee.Watch the full conversation here
He believes the government, the Reserve Bank of India (RBI) and regulators need to work together to identify the underlying causes of the outflows. One potential solution, he said, is source-based taxation, where foreign investors pay taxes in their home jurisdictions rather than in India, similar to the approach used for government securities.
Mehta said India could consider extending this framework to equities as well, particularly as other major economies follow similar tax arrangements. He believes such changes could help address potential barriers for global investors and improve capital flows into India.