MUMBAI/DELHI: Indian stocks surged on Thursday on expectations that the government may exempt foreign portfolio investors (FPIs) from an increase in taxes that was introduced this year.

Benchmark indices reported their biggest single day gain since 20 May. The BSE Sensex gained 636.8 points, or 1.74%, to 37,327.36, while the National Stock Exchange’s 50-share Nifty index rose 1.63% to 11,032.45 points.

Finance minister Nirmala Sitharaman is under pressure to withdraw the contentious tax measure introduced in the July budget as foreign investors exited Indian shares, sending stocks lower. After initially rejecting pleas from FPIs to roll back the increase in surcharge on income, the government has now decided to consult financial sector executives to help revive investor sentiment.

Sitharaman and senior finance ministry officials are likely to meet financial sector representatives on Friday in the capital, as per a plan of consultation announced last week.

While it appears that the government may reconsider its earlier position, no final decision has been taken as to how to provide relief to FPIs. “Government is aware of the FPI surcharge issue. Some relief may be announced soon," a government official said on condition of anonymity.

A rollback of the tax surcharge will be strongly welcomed by investors who are reeling under an unprecedented selling avalanche from FPIs, said Ajay Bodke, chief executive of portfolio management services at Prabhudas Lilladher.

“Refusal to roll back the surcharge on FPIs and absence of a fiscal stimulus to beleaguered sectors like autos and NBFCs (non-banking financial companies) are the principal reasons for the plunge in Indian equities. Any move to offer a generous relief on both these counts can lead to a massive short covering by speculators and a strong rally due to buying from FPIs and domestic Institutional investors."

The higher tax surcharge on the super-rich spooked FPIs, resulting in withdrawal of funds worth $1.93 billion in July. From budget till now, BSE Sensex, BSE Midcap and BSE Smallcap indices have declined 6-13%.

“We are in buy territory. While a V-shaped recovery in share prices depends on policy action, our indicators suggest that investors with a bit of patience will likely be rewarded well in the next 12 months," said Morgan Stanley in a report on 6 August. Analysts at Morgan Stanley expect the Sensex at 45,000 by June 2020.

Some analysts say the sharp decline has created pockets of investment opportunities. “The sharp correction over the past three months provides an opportunity. Investors have a choice of expensive consumption-related stocks as they brace for near-term ructions arising from further escalation in China-US trade issues and housing finance companies (HFC)-real estate liquidity/credit issues and inexpensive stocks elsewhere if they are willing to live with near-term market volatility and take a 2-3-year view," said Kotak Institutional Equities in a note on 5 August.

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