Budget 2024: BSE PSU plummets 6% to four-week low – 3 key factors behind the drop

In today's trading session, PSU stocks experienced a significant decline after Union Finance Minister Nirmala Sitharaman, in her presentation of the Union Budget for FY 2024–25, announced an increase in capital gains tax.

This move took investors by surprise, as it was not anticipated in advance. The hike in capital gains tax dampened investor optimism and led to a sharp drop in share values. 

On the other hand, Finance Minister Sitharaman kept India's FY25 capital expenditure outlay steady at ₹11.11 lakh crore, the same figure announced in February. Investors had expected an increase in the capex, which has negatively impacted sentiment towards PSU stocks.

In the interim Union Budget (2024–25), the government increased capital expenditure by 11.1% from ₹10 lakh crore to ₹11.11 lakh crore, accounting for 3.3% of GDP.

The third factor contributing to the decline in stocks today was profit-taking. The sustained rally in PSU stocks over recent months prompted investors to lock in gains, leading to the sell-off in today's session.

"The sharp correction in PSU stocks is a direct consequence of their inflated valuations. These stocks had experienced a significant run-up, largely driven by speculative interest. The increased capital gains tax has exposed their underlying fragility and forced a much-needed market correction. Additionally, the low free float in many PSU stocks makes them susceptible to sharp moves," said Sonam Srivastava, Founder and Fund Manager at Wright Research.

BSE PSU hits four-week low

On the back of multiple negative triggers, the BSE PSU index slumped 6% in today's intraday trade to hit a four-week low of 20,795 points.

Among individual stocks, Ircon International, Rashtriya Chemicals & Fertilizers, NBCC (India), IRFC, HUDCO, Punjab & Sind Bank, Rail Vikas Nigam, NHPC, General Insurance Corporation, Mangalore Refinery & Petrochemicals, and NALCO all fell between 4% and 7%, respectively.

On the positive side, the fiscal deficit target for FY25 has been revised downward to 4.9% of GDP, a significant reduction from the 5.1% target set during the interim budget in February.

This indicates that the government plans to borrow less, which could positively impact bond yields and benefit PSU banks through potential treasury gains.

In her budget speech on Tuesday, Finance Minister Nirmala Sitharaman announced that the fiscal deficit target for FY25 will be approximately 200 basis points below the earlier estimates for the current fiscal year.

The government plans to further lower the fiscal deficit to 4.5% or less by FY26, thereby adhering to its proposed fiscal consolidation path for the financial year 2025–26.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.