The cut in corporate tax rates announced by the government last week has provided the much-needed trigger for foreign investors to look at fresh investments in Indian equities.
While market participants believe that it might be too early to expect a reversal or even a slowdown in the outflows, they feel that the lower tax liability has certainly made the Indian market more competitive in terms of attracting foreign capital.
Last week, the government slashed the effective corporate tax rate to 25.17% and said that new domestic manufacturing firms incorporated after October 1 would be eligible for a tax rate of 15% without any incentives.
On Monday — the first trading session after the tax cuts — foreign portfolio investors (FPIs) were net buyers at nearly ₹2,700 crore, which was one of the highest single-day net purchases by overseas investors in recent times.
While FPIs have been net sellers in the following two trading sessions, market experts believe that the tax cuts would have a positive effect on FPI flows but it will take some time for the impact to be visible.
‘Will take time’
“The tax cuts have made India quite competitive compared to other emerging markets,” said U.R. Bhat, MD, Dalton Capital Advisors India.
“It has the potential to attract large FPI flows but it will take some time. The impact cannot be seen in a few weeks but it’s a very good starting point,” said Mr. Bhat.
“U.S.-China trade talks collapse or the initiation of impeachment proceedings against the U.S. President are big global developments and these events will certainly impact the Indian market. But, other things being equal, the tax regime has become attractive and foreign investors would be more attracted towards the Indian market than earlier,” he explained.
This assumes significance as FPIs continued to sell Indian stocks even after the government rolled back the tax surcharge that was announced in the Union Budget.
FPIs were net sellers at nearly ₹7,000 crore between August 23 — when the rollback was announced — and September 23 when tax rate cuts were announced.
The Sensex registered its biggest single-day gain in over a decade on September 20 even as some of the leading global financial majors were quick to raise their Sensex or Nifty targets post the tax rate cuts, reflecting a renewed bullish outlook.
Citi raised its March 2020 Sensex target from the earlier 39,000 to 40,500 citing anticipated earnings upgrade and expectations of further big ticket announcements.“We think the measures announced were the most ambitious reforms in a while and could act as a sentiment booster to equities which have been buffeted by tough macro and micro conditions this year – GDP growth slowdown, global risks, NBFC liquidity squeeze and EPS downgrades,” stated Citi, in its latest India Strategy Report. In a similar context, Nomura raised its Nifty March 2020 target to 12,545 on the back of a potential 7% earnings increase in fiscal 21.