India’s financial markets went into a tailspin on Friday, with benchmark equity indices clocking the sharpest single-day fall in nearly 15 months following the return of the long term capital gains (LTCG) tax on equities in this Budget.
Debt markets were also on edge with bond yields soaring in anticipation of higher interest rates due to the slippages indicated by the Centre on fiscal management.
The BSE Sensex, which had recovered after a 300-odd point dip on Thursday during Finance Minister Arun Jaitley’s speech, opened 200 points lower and tumbled through the day till it touched a low of 35,006.41 — a net loss of 900 points. It recovered 60 points in the last few minutes of trading to close at 35,066.75 — a 2.34% decline in one session. The broader Nifty lost 256.30 points or 2.33% to close at 10,760.60.
Adjustment, says govt.
The government appeared to brush off the market’s sharp reaction as an adjustment to the Budget’s proposal and argued that the intent behind reverting to the LTCG tax was to bring about parity in tax treatment of different asset classes and ensure that equities that have delivered good returns must also contribute to the tax kitty.
“The market is adjusting. As the market absorbs the information there would be some effect, some volatility... but nothing serious,” Economic Affairs Secretary Subhash Garg told The Hindu .
Twenty-seven of the 30 Sensex stocks declined, with Reliance Industries, Maruti Suzuki, Axis Bank, Bharti Airtel and Bajaj Auto all falling over 4% on Friday. Overall, over 2,500 stocks slipped on the BSE as against only 295 gainers, which included Sensex heavyweights TCS, Hindustan Unilever and Wipro. The Budget has proposed an LTCG tax on equity instruments on all capital gains exceeding ₹1 lakh at the rate of 10%, without offering any indexation benefit that allows gains to be set off against inflation.
“Investors were disappointed with the LTCG tax coming in, over and above the securities transaction tax (STT) (paid on all stock trades),” said Anita Gandhi, whole time director at Arihant Capital Markets.
Sectoral indices in red
All sectoral indices also ended in the red, with most shedding more than 3% each. The BSE Realty index was the worst hit with a fall of 6.28% or 162 points. Incidentally, the BSE Midcap and BSE Smallcap indices lost over 4% each.
Bond yields hardened as well during the early trading hours of Friday expecting a hawkish stance from the Reserve Bank of India (RBI).They cooled off only after reports that the central bank will conduct open market operations and buybacks.
The yield on the 10-year bond, which closed at 7.6% on Thursday, touched an intraday high of 7.68% before easing to 7.56% on Friday.
“Clearly, the government did not follow the glide path (for fiscal consolidation) … The bond markets will continue to be very anxious unless there is a statement in the central bank's upcoming monetary policy (on February 7) that rate hikes are not imminent,” said Abheek Barua, chief economist at HDFC Bank.
The government introduced STT in October 2004 to replace the then existing LTCG. STT is charged at 0.1% of the trade value in cash market trades.
In the derivatives segment, 0.05% is charged on the options premium while it is pegged at 0.01% on futures.
Bond yields hardened as well during the early trading hours of Friday expecting a hawkish stance from the Reserve Bank of India (RBI).They cooled off only after reports that the central bank will conduct open market operations and buybacks.
The yield on the 10-year bond, which closed at 7.6% on Thursday, touched an intraday high of 7.68% before easing to 7.56% on Friday.
“Clearly, the government did not follow the glide path (for fiscal consolidation) … The bond markets will continue to be very anxious unless there is a statement in the central bank's upcoming monetary policy (on February 7) that rate hikes are not imminent,” said Abheek Barua, chief economist at HDFC Bank.
