Nifty Tumbled on the Budget Concerns, LTCGT Hike Buzz and Muted Global Cues

  • Market Overview
  • Editors Pick

India’s benchmark stock index Nifty (NSEI) closed around 17149.10 Monday, tumbled almost -2.66% on the concern of populist budget, LTCGT hike buzz, and muted global cues. Nifty also plunged -3.50% last week. Nifty was already under stress on negative global cues amid lingering geopolitical tensions between Russia-Ukraine/U.S and the concern of faster Fed tightening despite Omicron disruptions and soft economic data.

On Monday, Dow Jones Futures stumbled after a report that NATO partners are preparing to deploy extra ships and fighter jets to NATO deployments in Eastern Europe. And in response, Russia said if the United States deploys more troops in Eastern Europe and the Balkans, it will respond. U.S. President Biden is considering deploying troops to NATO allies in Eastern Europe and the Baltics.

On late Friday, Russia-Ukraine tensions surged even after ‘fruitful’ meeting between Russia-U.S. as the U.S. State Department ordered diplomats' family members to leave the country safely and effectively using still available commercial flight: "Military action by Russia could come at any time---United States government will not be in a position to evacuate American citizens in such a contingency”.

Now from global to local, Indian market sentiment was additionally dragged by Q3FY22 mixed report card and guidance (so-far) coupled with the concern of a populist budget ahead of elections in 5-states. Further on Monday, Nifty plunged after a WhatsApp rumor about higher LTCGT and reintroduction of wealth tax: “Long term Capital Gain Tax to be revised upwards from 10% to 15% And 1 year to 3 year (sources) - Market in panic mood due to the same - FII selling due to revision in LTCG and Wealth-tax introduction”.

Talking about budget, the market is expecting:

  • Targeted capex/infra spending to promote growth rather than too many grants for the rural economy
  • A credible plan for a gradual fiscal consolidation path
  • Structural reform to control legacy inflation
  • Reintroduction of wealth and inheritance tax to address rising inequality during COVID
  • Restructuring of LTCGT from 10% to 15% and from 1-year to 3-year
  • Abolition of STT
  • Increasing the current standard deduction limit of Rs 50K to at least Rs 75K to provide some cushion to the salaried people to give some comfort amid higher inflation
  • The incentive for home offices and larger homes to cope with WFH
  • Reduction of medical insurance from 18% to 5% to encourage health insurance; for senior citizens, no GST
  • An incentive for EV and RE
  • Grants for the hospitality sector and job retention (furlough) scheme for past and any future lockdown
  • Permanent Emergency Credit Line Guarantee Scheme (ECLGS). The ECLGS entails a 100% credit guarantee by the National Credit Guarantee Trustee Company on loans extended by banks and NBFCs. MSMEs also want the Insolvency and Bankruptcy Code to be amended for recovery of MSME dues
  • Extension of MGNREGA and free food supply to be extended till at least another FY to boost rural consumption, which is now muted
  • Tax breaks for pandemic hit airlines industries and abolition of MAT from 18% to 5%
  • Clarity on private Cryptos and regulation, keeping in mind India has now over 15M active Crypto users, 2nd largest in the world
  • Ease of startup regulations and overseas listing

Conclusion:

Both Wall Street as well as Dalal Street were in the overbought zone after the recent rally and thus need some excuses to correct before starting the next wave of the rally (boom/bust cycle). Thus budget rumor and muted report card (including guidance) is a perfect trigger for correction. The buzz of the LTCGT hike is long pending from FY17 budget days after DEMO for the larger contribution of the Indian capital market towards the development of the country.

The hike in LTCGT is an idea to tax unaccounted/black money invested in the capital market directly or indirectly soon after the DEMO in late 2016. But the Modi admin never goes for it for the fear of doomsday for the market apart from the fact that such higher LTCGT will yield negligible additional tax revenue even from institutional investors. This time too, as the government needs a stable capital market to promote monetization of public assets (disinvestments), especially a mega IPO like LICI, it will unlikely hike LTCGT, but may also go for it with the abolition of STT to neutralize the adverse effect.

Bottom line:

The present volatility may be a great opportunity to invest in well-managed blue-chip companies as-well-as India’s long-term growth story.

Technically, whatever may be the narrative, Nifty Futures now has to sustain over 16800; otherwise, it may further fall to 16600-400, from where it will again bounce back towards 18400-600 in the coming days. However, if Nifty Future breaks 16400 for any reason (an all-out war between Russia-Ukraine, extremely hawkish Fed and worst budget); it may further fall to 15800/700 and 15100 levels.

Nifty

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  • SPS BHATIA @SPS BHATIA
    logical reasons for present correction in India, US capital indexes. But there must be more serious concern as the fall is sharp and heavy.
    Like 1
  • SPS BHATIA @SPS BHATIA
    logical reasons for present market fall. but there must be more serious concern as the fall is sharp n heavy.
    Like 0
  • Dibyalochan Babu @Dibyalochan Babu
    Very informative article,thank you for sharing
    Like 2
  • Dibyalochan Babu @Dibyalochan Babu
    Very informative article,thank you for sharing
    Like 0
  • Ashok Ghose @Ashok Ghose
    Very logical article
    Like 0
  • Vivek Singh @Vivek Singh
    EXCELLENT ,AWESOME
    Like 1

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