Why Sensex fell 1,400 points in 2 days post Budget 2018; Finance Secy blames global selloff, not LTCG tax

Indian stock markets are undergoing a bear phase with the S&P BSE Sensexcrashing about 1,400 points in last two days since after Budget 2018 had been presented. Amid a market-wide sell-off, about 1,400 points had been washed away from the benchmark Sensex index in the last two days while Nifty index had fallen to near one-month low. As investors worries have been substantially intensified on Finance Minister Arun Jaitley bringing LTCG (Long-Term Capital Gain) on equities over Rs 1 lakh under the tax net, Finance Secretary Hasmukh Adhia has blamed global market sell-off for the bloodshed in Indian markets dismaying the LTCG tax effect.

Indian stock markets are down not because of LTCG but because of global markets correction, TV channels reported Hasmukh Adhia saying in an event. It’s unfortunate that our move came at a very wrong time due to the move in global markets, Hasmukh Adhia said further.

We take a look at three reasons which are weighing on Indian equity markets

Global stocks setback

Earlier on Friday last week, on the worries about the impact of a tightening job market on the prospects for inflation and a surge in bond yields sent investors fleeing equities with the Dow Jones Industrials Average plunging almost 666 points, its biggest single-day percentage loss in 20 months, Reuters said in a report. It was the biggest daily point fall in the Dow Jones Industrial Average since December 2008 during the global financial crisis. With Friday’s rout, Wall Street’s three major indexes logged their biggest weekly losses in two years, after closing at record highs the previous week. The S&P 500 and Dow saw their worst weeks since early January 2016 while Nasdaq had its worst week since early Feb 2016, Reuters added.

The Dow Jones Industrial Average fell 665.75 points or 2.54% to 25,520.96, the S&P 500 lost 59.85 points or 2.12% to 2,762.13 and the Nasdaq Composite dropped 144.92 points or 1.96% to 7,240.95. On the same day, United Kingdom’s FTSE shed 0.63% to end at 7,443.43; Germany’s DAX fell 1.68% to settle at 12,785.16; France CAC 40 tumbled 1.64% to close at 5,364.98.

LTCG blues

In a major development in Budget 2018, Finance Minister Arun Jaitley introduced a tax on LTCG (Long-Term Capital Gain) on shares over Rs 1 lakh at 10%. Following which a knee-jerk reaction was observed in the Indian equities on Thursday as amid a heavy sell-off pressure, in the intraday trades on Thursday, BSE Sensexplunged 463.28 points to hit an 8-day low of 35,501.74. Indian bourses suffered heavy losses on Friday last week as investors sentiments took a heavy jolt over after Finance Minister bringing 10% tax on LTCG. The 30-share Sensex registered its biggest single-day fall in two-and-a-half years and plummeted by 840 points to settle at 35,066.75 on Friday.

Fiscal deficit distress

The Finance Minister Arun Jaitley on Thursday fixed the higher fiscal deficit target for the financial year 2018-2019 at 3.3% as against the target of 3.2% in the current financial year on account of shortfall in non-tax revenue due to deferment of spectrum auction. FM Jaitley also revised the fiscal deficit for the fiscal year for 2017-2018 upward to 3.5% as against targeted 3.2%, which in absolute terms was about Rs 5.95 lakh crore. He said that the government will receive the GST revenue for 11 months, which will have the fiscal impact. He said that the revised estimate for FY18 is Rs 21.57 lakh crore as against estimated Rs 21.47 lakh crore.

— Indian equities on Monday —

Meanwhile today, India’s stock market extended the losses amid the global sell-off led by a downturn in sentiments followed by uncertainties over US job market, the introduction of a tax on LTCG on equity over Rs 1 lakh in India and subdued action ahead of RBI’s repo rate decision. The S&P BSE Sensex crumbled 545.95 points to hit a day’s low of 34,520.8 whereas NSE Nifty tumbled 173.8 points to hit a day’s low of 10,586.8, nearing its one-month low of 10520.1 as on 5 January 2018 on Monday.

The benchmark Sensex opened at 34,718.85, down by 347.9 points while the wider share indicator Nifty started 156.3 points lower at 10,604.3. A market-wide sell-off pattern has been observed in the Indian equities with all the broader market indices and most of the sectoral indices trading down in red. As at 12:00 pm, Sensex was trading 0.81% or 284.81 at 34,781.94 while Nifty was trading 86.6 points or 0.8% lower at 10,674.