How can the triple sundae with the layers of incentives for FPI, ECBs and FCNR (B) deposits be interpreted? The view held so far has been that the external position of the economy is fairly resilient, with the reserves covering 11 months of imports. The situation was nothing like what it was in 2013, when aggressive measures had to be taken. Yet, this offering was beyond expectations and would certainly help in shoring up forex reserves.

Let us look at them sequentially. The rationalisation of the system of taxation on FPIs was long overdue. Investors should be taxed in their territory of origin, and, hence, removing the capital gains tax as well as the tax on interest seems logical. In fact, having a withholding tax on interest earned on debt is messy. This is so because it cannot be set off in the home country where investors are liable to pay taxes. Further, the tax was being paid on the rupee value while the repatriation was in dollars, which could mean a loss given the rupee depreciation. In fact, the global rule is that such income is taxed in the home country. This has been a long-standing demand from the FPIs which has finally been accepted. Hence, this move was contemporaneous with the thought process of the RBI wanting to shore up the forex reserves.

From the point of view of FPIs, the move is positive. This has been combined with greater access to the FAR bucket........

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