Fifteen minutes during Finance Minister Arun Jaitley’s Budget speech caused panic in dealing rooms of most stock broking houses. Months of stock market calm was shattered on Thursday between 12.15 pm and 12.30 pm when Jaitley uttered the words ‘Long Term Capital Gains’ (LTCG) tax for the first time during the last segment of his two-hour Budget speech, sending a chill creep down the spine of many traders. The Sensex, India’s equity gauge, crashed nearly 755 points from the day’s high to touch a low of 35,501. Small- and mid-cap stocks were a sea of red in those fifteen minutes.
“A lot of frayed nerves were calmed only when Jaitley uttered the word ‘grandfathering’ in his speech and within minutes the Sensex was on its way to recovery,” said Jatin Shah, a sub-broker for Ventura Securities in Mumbai.
LTCG, the impost most dreaded by stock market players, was imposed by the government in its last full Budget ahead of next year’s national elections. While there has been heated debate among stock market players on the tax since December, few believed that the government would dare to implement it in an election year. Jaitley did go for the ‘kill’ but its impact was at least temporarily nullified as he said that all equity investments as on date would be protected or ‘grandfathered’ from the tax.
“For the stock markets, the day started on a lacklustre note, but those fifteen minutes of confusion on the LTCG gave some nail-biting moments. That apart, there was nothing much,” said Sudip Bandyopadhyay, Chairman, Inditrade Capital.
Cheers agri-related ones
Shilpa Kumar, MD & CEO, ICICI Securities, said despite these all-encompassing steps, the government has managed to stay within the acceptable range of fiscal deficit target. Moreover, the broadening of tax was also achieved with the calibrated move of introducing LTCG with the “grandfathering clause” aimed at allaying market concerns.
The Sensex began the day with gains of around 150 points when business news channels flashed that the Finance Minister was on his way to Parliament from North Block. The index extended its gains to 250 points when Jaitley rose to present the Budget at 11 am and there was not much action until after 12 noon as agri-related announcements took the airtime.
Reverses from green
“Usually, there has not been much action in stock markets during Budget days in the recent past as people’s fixation with it has come down,” said Manish Gunwani, CIO — Equity Investments, Reliance Mutual Fund.
“Yet, on Thursday, people were more attentive than usual due to the initial hype of LTCG and this being the last full Budget ahead of general elections. At the end, I could see more puzzled faces, and the market closing too displayed the same.”
But by 1.40 pm, with a little over an hour-and-a-half left for market closing, the Sensex recovered nearly 700 points from the day’s low. Just when traders believed the fall was a decoy, the index reversed its course to close at 35,906, nearly 60 points below its Wednesday closing price.
FPIs turn buyers
In the past, out of 21 Budget trading sessions, the Sensex and the Nifty have had 11 sessions of positive closing and 10 where the close was in negative zone. Budget day volatility during the current government picked up only in 2017 when the markets rose nearly 1.7 per cent on February 1, 2017, as mutual funds pumped in record money. On Thursday, foreign portfolio investors bought stocks worth ₹1,099 crore, while DIIs net sold stocks worth ₹358 crore.
According to Navneet Munot, ED & CIO, SBI Mutual Fund, the other aspects of the Budget such as increased recourse to PSE borrowing (₹1.7 lakh crore), reduced tax differential between bonds and equity (post LTCG), higher MSP for farmers (implying likelihood of higher inflation) and more income in the hands of senior citizens (who invest in fixed income space) can have mixed impact for the bond markets. Consequently, it is too early to ascertain the overall impact on the capital markets.