Benchmark indices 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% of gross domestic product from the previous 3.0%. The government also unveiled a 10 percent tax on long-term capital gains in equity markets.
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%, well above the Reserve Bank of India’s target of 4%.
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.