Currency, tax risks tempering private equity optimism in India, investors say

MUMBAI, March 10 (Reuters): Currency depreciation and high taxes remain key constraints on private equity (PE) returns from India, investors say, even as the country's strong growth outlook and improving exit environment cement its place in the emerging market space.
The Indian rupee has depreciated 1.9 per cent against the dollar so far in 2026, after falling 4.2 per cent and 2.4 per cent in the last two years.
"And then when you exit, (there is) capital gains tax of 10-15 per cent - those are capping returns. Competing markets don't necessarily have (these drags)," Amit Chandra, managing director of alternative asset manager 57 Stars, said at the Indian Venture and Alternate Capital Association conclave on Tuesday.
The comments underscore a key concern in India's PE landscape. Global investors increasingly view India as a core allocation within emerging markets, supported by stronger managers, a deeper deal pipeline, and a healthier market for exits, particularly through initial public offerings.
However, foreign allocators underwriting India must account for a steady erosion in returns from the rupee as well as taxes applied at exit, said Chandra, as the country offers fewer opportunities to boost returns through leverage, unlike some other markets.
Indian central bank rules restrict bank financing for share acquisitions, while corporate law limits the use of a target company's assets to fund its own purchase.
Taxation regimes remain crucial if India wants PE capital to scale further, Chandra added.
On the other hand, "lower leverage positions India better", said Rohit Agarwal, vice president and head of Asian PE at Aksia.
India's relatively lower use of leverage can cut both ways for PE investors - while it may limit the ability to boost returns through debt, it can also leave deals less exposed to interest-rate, refinancing and broader macro shocks.