Finance secretary Hashmukh Adia may be largely right when he attributed the latest sell off in Indian stocks to spooking and volatility in global equity markets over the last two days.
From the finance ministry’s prism, slapping long-term capital gains tax (LTCG) on equity linked mutual fund investments could still be a coincidence. Not a happy one at that. Anyway, finance ministry can take refuge behind the Dow Jones sell off which triggered a global contagion. But, this doesn’t ignore the fact that LTCG and DDT are part of the underlying temblors that have rocked Indian bourses.
Equally, there’s no denying the fact that investors’ wealth of over Rs 9.6 lakh crore has been wiped out in Indian markets post presentation of the budget by finance minister Arun Jaitley on February 1.
In an intricately well-connected global market scenario, domino effect was inevitable. And, the tsunami of sorts that began in the US due to highest pay rises since 2009 which impact bond yields and kick started speculation that US would hike interest rates more than twice this year meant that market participants worldwide were left licking their wounds. Markets cannot be unidirectional, money has to be taken off the table, all the gains of 2018 have been wiped off in 48 hours of bloodletting.
At the same time, one cannot discount the fact that all stakeholders in the Indian corporate world and stock markets have vehemently opposed LTCG. Small investors will feel the big pinch of 10 per cent LTCG on earnings from equity-linked funds.
The biggest negative was that Dow futures cracked wide open once again on Tuesday afternoon and while the Indian market which had gone into free fall reversed its fall to some extent, sentiment remains bearish. Forth or exuberance was there and a correction may have cleansed the system partly, though no one knows the bottom as of now. The reality is that corporate India by and large seems to be registering earnings close to 22 per cent this quarter signalling a revival in India Inc’s fortunes. Markets are a function of events, liquidity and forward earnings potential of companies that make up the indices. Cataclysmic events over the weekend have shown the vulnerable side of the markets. Liquidity in the main from domestic mutual funds may suffer in the short term till the LTCG and DDT overhang continues. Redemption pressure may finally be a reality with this fall.
For instance, increase in US interest rates would only push up the liability of Indian firms and high net worth individuals that have availed dollar loans. Servicing costs of these loans is bound to put huge pressure on both companies and individual borrowers given that US Federal Reserve was set to increase the interest rates by 1 – 1.5 per cent over next 12 months. The real joker in the pack remains bond yields which can play havoc with treasury operations of Indian banks, their trajectory remain upward. Investors will also look at other asset classes for safe haven investment as they shift out of equity. The commentary from the Indian central bank at this vital juncture is going to be crucial.
Higher returns in US markets would also mean that American investors were bound to pullout some of their investments in emerging markets including India to maximise their gains back home.
High inflation expectations, expansionist economic policies pursued by Donald Trump’s administration coupled with lowest unemployment numbers would have their bearing on markets like India.
Depreciation of rupee as against US greenback by over 30 paise in a single day would also impact India’s trade globally. Its not just India but across the continents, the impact of US markets collapse would be experienced. From Europe, Asia to Latin America and elsewhere, the impact of stronger economic data and jobs scene in US leading to larger spending in America will have ripple effect on other countries.
Given the huge volatility and wild swings that Indian markets were going through, finance minister Arun Jaitley may like to consider deferring his proposal on LTCG at least for the moment.
In any case, not much was offered to the salaried middle-class investors through the budget. Income Tax exemption limits were not raised. Nor were the IT slabs expanded to reduce the tax liability. Leave alone providing some relief to this class of investors that seriously fill-in the coffers, Jaitley’s LTCG proposal may not be taken kindly.
For investors, taking recourse to panic selling may not be the best option while markets are in a tailspin. While attempting to curtail losses, investors could also use this opportunity for value buying at lower levels. Diversifying investments to other asset categories and hedging the risks based on professional advise will be the way to go.