Higher taxes on equity investments and declining risk appetite among global investors amid an increase in US bond yields saw the benchmark Sensex slide 840 points, or 2.3 per cent, to 35,907 and the Nifty 50 index tank 256 points to 10,760. This was the worst single-day fall since November 2016, when the Centre banned the use of high-denomination currency notes, and the worst after-budget day performance since 2009.
The broader market small and mid-cap indices plummeted over 4 per cent each. The market slump eroded investor wealth worth Rs 4.6 trillion, with the total market capitalisation (m-cap) of all listed companies slipping below Rs 150 trillion.
Experts said the market was concerned about the reintroduction of the tax on long-term capital gains (LTCG) without the removal of the securities transaction tax (STT). Also, breaching the fiscal deficit targets to allow for higher rural spending ahead of the 2019 general elections dampened sentiment.
Weakness in the global markets with the yield on the 10-year US bond increasing to 2.8 per cent put further downward pressure on the markets. Most Asian markets closed in the red, the European markets traded more than 1 per cent lower, while the futures market pointed to a lower opening in the US market.
As the yield on the 10-year treasury moves towards 3 per cent, investors are forced to rethink their portfolio allocation as bond markets are beginning to look attractive relative to equities, according to experts.
The yield on the domestic 10-year government security rose to as much as 7.68 per cent but managed to settle at 7.56 per cent, 4 basis points (bps) lower than the previous day’s close but 13 bps higher than the pre-budget close.
Delay in fiscal consolidation and a spike in bond yields could put pressure on the Reserve Bank of India (RBI) to turn more hawkish, experts said.
The central bank is set to announce its rate decision on February 7. The Centre set the fiscal deficit target of 3.3 per cent for 2018-19, higher than market expectation of 3.2 per cent.
Banking stocks were among the major losers on Friday, with the BSE Bankex slipping close to 3 per cent.
“A higher-than-estimated fiscal deficit has led to a spike in government bond yields, with the 10-year yield up 110 bps since July 2017. The government also introduced a 10 per cent LTCG. These factors point to higher cost of equity, which is likely to cap market valuations,” said Saion Mukherjee, ·head of India equity research, ·Nomura.
Markets had surged in the run-up to the Budget, with the Sensex gaining 5 per cent in January. The gains were on the back of inflows to the tune of $2 billion from overseas investors.
“Budget 2018 proposals were largely on expected lines. Sectors exposed to rural India should benefit, but there isn’t much to excite an already inflated market,” said Sanjay Mookim, India equity strategist, Bank of America Merrill Lynch, which has a set Sensex target of 32,000 for December 2018.
All the BSE sectoral indices ended with losses on Friday, with the Realty index dropping the most at 6.3 per cent. Only 295 stocks gained, while 2,548 ended with losses on the BSE.
Overseas investors net bought shares worth Rs 9.50 billion, while domestic investors pulled out Rs 5.10 billion, provisional data showed.