India’s benchmark equity index dropped for a third day as the government proposed to revive a tax on equity investments 14 years after it was scrapped to offset revenue losses.
The S&P BSE Sensex fell 0.2% to 35,906.66 in Mumbai, after its best January gain since 2015.
Twelve of 19 sectoral sub-indexes compiled by BSE declined led by a gauge of consumer goods companies. Oil & Natural Gas Corp and Sun Pharmaceutical Industries were the worst performers on the benchmark index.
“It’s time to be conservative as most of the market participants are invested nearly to the fullest,” said Ajay Srivastava, managing director at Dimensions Consulting.“I advise investors to keep rotating their portfolio at the right times as there will hardly be any new opportunities to make money.”
Profit exceeding Rs100,000 ($1,565) from shares held for more than a year will be taxed at 10%, Finance Minister Arun Jaitley told lawmakers in New Delhi yesterday.
At present, gains from equity investments held for more than 12 months are exempt from tax.
“The return on investment in equity is already attractive even without tax exemptions,” the finance minister said. “There is therefore a strong case for bringing the long term capital gains from listed equities into the tax net.”
Meanwhile India’s 10-year bond yield yesterday shot up by over 18 basis points to closed at over 22-month high while rupee weakened past 64 mark against US dollar after the government revised upward its fiscal deficit target for the fiscal year 2019 in the budget. The 10-year bond yield rose to 7.605%, a level last seen on March 11, 2016, up 18 basis points from its Wednesday’s close of 7.43%. One basis point is one-hundredth of a percentage point.
Bond yields and prices move in opposite directions.
The home currency closed at 64.03 per dollar, down 0.69% from its previous close of 63.59. The rupee opened at 63.70 per dollar and touched a low of 64.04 per dollar.
Since the beginning of this year, the rupee has fallen 0.24%, while foreign institutional investors have bought $2.08bn of local equities and $1.35bn of debt. Finance minister Arun Jaitley in the budget revised his fiscal deficit target for 2018-19 to 3.3% of the gross domestic product (GDP) against the earlier target of 3%, after breaching the deficit target for 2017-18. While the budget estimate of fiscal deficit for 2017-18 was 3.2% of the GDP, the revised estimate is now 3.5% of the GDP, the same as 2016-17.
“The primary deficit (excluding one-off revenues) is modestly contractionary, which may be hard to attain given the political calendar.
This will see fiscal policy play a smaller role in supporting growth, though well-implemented reforms towards the farm and rural sector might prove to be a tailwind to the consumption turnaround” said Radhika Rao, economist at DBS Bank.
“Besides the modest miss in the fiscal targets, the bearish mood in the bond markets is also likely a reflection of the notable jump in G3 yields” Rao added.
Jaitley, unveiling the budget for the next fiscal year, pegged the government’s borrowing in the year at Rs6.06tn, compared to Rs6.05tn in the year to March 2018.
The government also proposed that the corporate sector should raise at least one-fourth of their funding requirement through bonds which analyst expects may create oversupply of bonds.
“The crowding out effect due to issuances of more Corporate Bonds, especially increasing thirst on market borrowings by high rated large PSUs will exert pressure on Government bonds too as a substitution effect.
I think yields to remain under pressure in absence of any positive trigger”, said Soumyajit Niyogi Associte Director India Ratings and Research.
“The market has already seen changes in borrowing number as opposed to commitment, now the fear of fiscal slippages will be more critical for the yields”, Niyogi added.


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