Sell-offs in mid- and small-caps were sharp, with the BSE Midcap losing 1.99% and the BSE Smallcap slipping 1.83%
From 5 July (budget) till date, Sensex has been down nearly 4%, while BSE Midcap and BSE Smallcap have slipped 5-7%
The stock markets slipped over 1% in a budget overhang on Friday as foreign investors appeared disappointed with the government’s stance on taxing the super rich, while corporate earnings for the June quarter continued to signal a slowdown in the economy.
The Sensex ended at 38,337.01, down 560.45 points, or 1.44%, while the 50-share Nifty closed at 11,419.25, down 177.65 points, or 1.53%. Sell-offs in mid- and small-cap stocks were sharp, with the BSE Midcap losing 1.99% and the BSE Smallcap index slipping 1.83%.
Shrugging off pleas by foreign portfolio investors (FPIs) against the budget proposal for a super-rich tax, finance minister Nirmala Sitharaman said Thursday that FPIs may consider structuring as companies, as those registered as trusts will have to pay the proposed higher tax surcharge.
Arun Thukral, managing director and chief executive, Axis Securities Ltd, said: “Today’s correction was in response to a combination of surcharge on the FPIs, tepid results by a couple of companies and rising slowdown concerns. Markets are expected to be volatile in the near term due to US Federal Reserve policy meeting scheduled, progress of monsoon and results of various companies." However, he added that though the slowdown issues could drag the markets in the medium term, they offer an opportunity to long-term investors who have an investment horizon of more than three years.
The Union budget presented on 5 July proposes raising the income tax surcharge on taxpayers with income of ₹2-5 crore, sending foreign institutional investors (FIIs) into a selling spree that drove markets down.
Sitharaman proposed to raise the surcharge on taxpayers with incomes of ₹2-5 crore from 15% to 25%, and from 15% to 37% for those earning more. This takes the effective tax rate for those two groups to 39% and 42.74%, respectively.
In the absence of domestic money in Indian equities, foreign liquidity is critical to keep the stock markets buoyant. Though FIIs have bought Indian shares worth $10.30 billion this year so far, they sold $1,038.12 million in July alone, the highest monthly outflow in 2019.
Domestic institutional investors were net sellers of Indian shares worth ₹1,770.53 crore this year, but there was an inflow of ₹5,838.55 crore in July, the highest monthly inflow so far in 2019.
Dharmesh Shah, technical analyst, ICICI Securities, said breach of key support level indicates that the Nifty is heading toward 11,300 levels, while stock-specific action would continue “as we sail through Q1FY20 earnings and derivatives expiry of July futures and options (F&O) series".
So far in 2019, Sensex has gained 6.29%, while BSE Midcap and BSE Smallcap have fallen 8.81% and 9.49%, respectively. From 5 July (budget) till date, Sensex has been down nearly 4%, while BSE Midcap and BSE Smallcap have slipped in the range of 5-7%.
However, according to investment banker Morgan Stanley, Indian equity markets may see an overseas flow of $25 billion if the government is able to implement three key proposals pertaining to FPIs. “The government has started to address India’s free float problem and proposed changes in the recent budget. Our estimates imply inflows of $25 billion, a 146 basis point (bps) increase in India’s weight in the MSCI EM index, and a 7 percentage point rise in India’s foreign free float if all three proposals are implemented," it said in a report on 16 July.
In the budget, Sitharaman had said that the minimum statutory limit for FPI investments in a company was proposed to be increased from 24% to the sectoral foreign investment limit. The government will also increase the minimum public shareholdings of all remaining listed public sector companies to 25%. The finance minister also asked the Securities and Exchange Board of India to consider increasing the minimum public holding from 25% to 35%.
Nomura also agreed that since the budget, there has been concern among foreign investors on potential supply of commercial papers, as the government and promoters sell stakes to meet divestment targets and free float requirements. “We think such selling will be spread out over years. In addition, the impact could be negated by higher foreign flows, as the weighting of Indian stocks increase in benchmark indices due to higher free float and foreign ownership limits," it said in a note on 8 July.
Nomura expects the markets to get valuation support from lower bond yields. It said that further steps taken by the government and the Reserve Bank of India to infuse liquidity into non-banking financial companies should allay concerns of a deeper economic slowdown.