Sensex, Nifty fall, bonds slide on budget woes

By Vishal Sridhar

(Reuters) - Indian shares tumbled on Friday as the long-term capital gains tax on equities investments dampened sentiment, while bonds slid for a second consecutive session on worries the central bank would become more hawkish on inflation.

The weak sentiment came a day after the government unveiled its budget for the year starting in April that raised spending for rural sectors and healthcare, widening the fiscal deficit target to 3.3 percent of gross domestic product from the previous 3.0 percent.

Investors worried that higher spending and the government's move to raise minimum support prices for crops could lead to higher retail prices at a time when consumer price inflation has already hit a 17-month high of 5.21 percent, well above the Reserve Bank of India's target of 4 percent.

That is leading to fears the RBI could adopt a more hawkish tone at its policy review on Feb. 6-7, although it is widely expected to keep rates on hold.

The government also unveiled a 10 percent tax on long-term capital gains in equity markets.

"Long-term capital gains tax on equities is not welcomed by the markets and fiscal slippage is another reason that's driving the markets down," said Neeraj Dewan, director, Quantum Securities.

The Nifty was down 1.2 percent at10,874.30 as of 0538 GMT after slumping as much as 1.73 percent, the biggest percentage loss since Dec 18, 2017.

The Sensex was 1.34 percent lower at 35,426.35, after falling as much as 1.65 percent.

Meanwhile, the benchmark 10-year bond yield rose 7 bps to 7.65 pct after rising 17 bps on Thursday, while the rupee weakened to 64.1250 from its 64.02 close on Thursday.

All major NSE indexes witnessed selling pressure. The Nifty Realty index dropped as much as 8.3 percent, its biggest percentage loss since November, 2016.

However, ITC Ltd bucked the trend, rising as much as 3.7 percent, as the budget left the tax on cigarettes unchanged.

(Reporting by Vishal Sridhar in Bengaluru; Editing by Sunil Nair)