Benchmark indices saw volatile swings on Tuesday, as the benchmark Sensex moved 1,500 points intra-day after the Union Budget proposed higher capital gains tax and securities transaction tax (STT). However, after the initial decline, the key indices saw quick recovery thanks to domestic investors.
The benchmark Nifty and Sensex fell 1.8% and 1.6%, respectively, intra-day, but ended marginally lower around 0.1%. The 50-stock index ended the day 30.20 points lower at 24,479.05 points and the Sensex fell 73.04 points to 80,429.04 points.
The domestic institutional investors bought shares worth 1,418.82 crore, while the foreign portfolio investors sold Rs 2,975.31 crore of shares, according to the provisional data from the exchanges.
The volatility in the broader market was the highest in a decade compared to the previous Budget days. The midcap and smallcap indices fell as much as 4% intraday, before ending 0.7% and 0.2% lower, respectively. Overall investor wealth declined by Rs 1.91 trillion to Rs 446.41 trillion.
While the markets were trading almost flat initially during the Budget speech, the volatility kicked in after Finance Minister Nirmala Sitharaman proposed raising the long-term capital gains (LTCG) tax from 10% to 12.5% and short-term capital gains (STCG) tax from 10% to 15%. Apart from this, the securities transactions tax (STT) on futures and options will also be increased to 0.02% and 0.1%, respectively.
While the STT on derivative trades was, to an extent, expected by market participants, the increase in capital gains tax came as a surprise.
Market participants were largely disappointed that the capital gains tax is being implemented at a time when the going has been good for the market. Both the indices have returned over 20% in the past one year.
“The Budget leaves a mixed sentiment. Sticking to fiscal consolidation and discipline is a positive…. What was unexpected was that while rationalizing capital gains structure we would see a slew of measures that basically increases tax outgo for investors that too long term investors across the asset classes; that’s a negative surprise,” said Aashish Sommaiyaa, CEO of WhiteOak Capital Asset Management.
Venkat Chalasani, chief executive of the Association of Mutual Funds in India said that while the changes in rates for LTCG and STCG were not anticipated, “the markets will take them in their stride”.
The fact that LTCG on equity asset classes is still applicable after the 12 months, which is better than 24 months for other asset classes, could have aided the recovery in market, an expert said.
However, market participants believe the higher taxes proposed in the Budget may not be the last, especially for the futures and options segment, in the near-term. This may continue to weigh on investor sentiment.
“This can be the beginning of reforming the capital markets and curbing retail participation in the F&O segment,” said Deepak Ramaraju, senior fund manager at Shriram AMC, who expects more measures in the F&O space in the days to come.
Lakshmi Iyer, CEO-Investment & Strategy at Kotak Alternate Asset Managers said this may be a near-term sentiment spoiler, but the market will now shift focus to growth trajectory and earnings potential. “The medium to long term case for equities remain intact,” she said.
Among stocks and sectors, real estate and public sector banks were the worst hit today, while the fast-moving consumer goods, consumer durables and other defensive sectors were the biggest gainers.
The BSE Realty index was the worst hit among sectors falling over 2% as the indexation was removed from LTCG tax. The consumer durables and FMCG stocks were in demand on reduction in import tax on gold and measures to spur rural consumption.
