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Nachiket Kelkar
Nachiket Kelkar

MARKET WRAP

Budget fallout: Stocks log biggest fall in almost 15 months

broker-stocks [File] Weakness across several major global equity markets also added to the nervous sentiments on the street

Indian equity markets plunged more than 2 per cent on Friday, their biggest fall in almost 15 months, as the Budget proposal to tax long-term capital gains, fiscal deficit concerns and worries that the RBI may possibly raise interest rates this year spooked investors.

Weakness across several major global equity markets also added to the nervous sentiments on the street.

The BSE Sensex hit a low of 35,006.41, before closing at 35,066.75, down 840 points or 2.3 per cent. The NSE Nifty 50 declined to a low of 10,736.10, and finally closed at 10,760.60, down 256 points or also 2.3 per cent. The carnage wiped off Rs 4.5 lakh crore of market cap on Friday.

“The major part of today’s correction can be attributed to the budget announcement of imposition of long term capital gains tax on equity, introduction of a tax on distributed income by equity oriented mutual funds and fiscal slippage. The move surprised the street as most participants were factoring in a change in definition of long term to two or three years from a year,” said Devang Mehta, head of equity advisory, Centrum Wealth Management.

Finance Minister Arun Jaitley in his Budget on Thursday proposed a 10 per cent tax on long-term capital gains of over Rs 1 lakh, although past gains made till January 31, have been exempted.

Furthermore, to bring in parity, a 10 per cent tax on dividends distributed by equity mutual funds was also proposed.

The move comes at a time equity markets have seen record inflows from domestic investors, who pumped in Rs 1.26 lakh crore in equity mutual funds over April-December. The inflows were significantly higher than the Rs 46,000 invested in the same period a year ago.

On the fiscal front, the government missed fiscal deficit targets for 2017-18, despite a cut in capital expenditure and the finance minister signalling that fiscal consolidation will be slow going ahead has worried investors, leading to a spike in bond yields, although there was some recovery late in trading on Friday after a news agency reported, quoting a finance ministry source, that the Reserve Bank of India may consider open market operations to purchase bonds to support government's borrowing programme.

There is also worry that the Budget proposal to increase minimum support price on agricultural produce by 1.5 times cost of production would weigh on inflation and that in turn would prompt RBI to take an increasingly hawkish view on interest rates.

On the stock markets, there was carnage across the board. Mid-cap and small-cap stocks, which had seen a much sharper rise in the last few months, were among the hardest hit. The BSE Mid-Cap index slumped 4 per cent, and the BSE Small-Cap index was down 4.7 per cent on Friday.

Among the major losers, auto stocks, led by Bajaj Auto, Maruti Suzuki, Mahindra & Mahindra, Hero MotoCorp and Tata Motors, tumbled 2.50-5.0 per cent. Banks, including State Bank of India, ICICI Bank, Kotak Mahindra Bank, Yes Bank and Axis Bank declined around 2.50-4.0 per cent.

Among other bluechip stocks, Reliance Industries fell 4 per cent, Bharti Airtel declined 4.6 per cent, Tata Steel was down 3.9 per cent and Larsen & Toubro ended near 3 per cent lower.

Analysts say the equity markets' performance this year will be largely dependent on corporate earnings recovery and how the macro-economic situation pans out.

“The performance of the market will depend on India's macro-economic outlook (not just the central government's fiscal position) over the next few months and earnings outlook for FY2019 and FY2020. The street has high expectations about strong earnings growth for both the years,” said Sanjeev Prasad, co-head of Kotak Institutional Equities.

Analysts say market corrections like that on Friday will lead to some pullback in the expensive valuations and therefore should be used to buy quality stocks, that have strong earnings potential and good management backing.

“The markets were overheated and a healthy correction will lead to some bit of P-E (Price to Equity ratio) compression. Earnings for this quarter so far have shown good traction. One should ideally have a shopping list ready and a strategy to deploy in tranches. Rural consumption, agri & agri-related plays, infrastructure, capital goods and cement are few themes and sectors to nibble into,” said Mehta of Centrum Wealth.

Consumer-facing firms which have a strong rural reach, for instance, fast moving consumer goods companies like ITC and Hindustan Unilever, country's largest tractor maker Mahindra & Mahindra, and two-wheeler maker Hero MotoCorp, apart from agri-inputs companies like those in seeds and agri-chemicals are expected to benefit from the huge rural investment push in the Budget.

Others like insurance firms and healthcare companies may also benefit from the Budget's proposal to provide health insurance cover to 10 crore families.

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