Stock market on Budget 2024 Day: Nifty 50, Sensex shrug off tax blow, recover from low to end almost flat

Budget 2024: Considering the impressive reversal of market benchmarks from the day's lows, it can be said that the Indian stock market, to a fair extent, shrugged off concerns over an upward revision in taxes on capital gains. The frontline indices—the Sensex and the Nifty 50—closed almost flat on Tuesday, July 23.

The Indian stock market benchmarks plummeted nearly 2 per cent during the session in a knee-jerk reaction to Finance Minister Nirmala Sitharaman's announcement of hikes in the Security Transactions Tax (STT), long-term capital gains tax (LTCG), and short-term capital gains tax (STCG).

Following FM's announcements on capital gains taxes, Sensex fell 1,278 points, or 1.6 per cent, to 79,224.32, while the Nifty 50 plunged 435 points, or 1.8 per cent, to the level of 24,074.20 during the session on Tuesday.

The key indices, however, recovered most losses as the Sensex closed 73 points, or 0.09 per cent, lower at 80,429.04, while the Nifty 50 settled 30 points, or 0.12 per cent, down at 24,479.05.

Mid and smallcap indices underperformed benchmarks. The BSE Midcap index suffered a loss of 0.74 per cent, while the Smallcap index ended 0.18 per cent lower.

Shares of HDFC Bank, Larsen & Toubro, Reliance Industries and ICICI Bank ended as the top drags on the Nifty 50 index. On the other hand, shares of ITC, Titan, Infosys and NTPC ended as the top contributors to the index.

On Tuesday, Sitharaman proposed to increase the rates of STT on the sale of an option in securities from 0.0625 per cent to 0.1 per cent of the option premium, and on sale of a futures in securities from 0.0125 per cent to 0.02 per cent of the price at which such futures are traded.

Moreover, the FM announced that LTCG on all financial and non-financial assets will attract a tax rate of 12.5 per cent from 10 per cent earlier and that STCG tax on certain financial assets will attract a tax rate of 20 per cent from 15 per cent earlier.

Tax increase a short-term dampener

Experts observed that the Budget was fairly on the expected lines and avoided populism. The fiscal deficit target was lowered to 4.9 per cent of GDP, significantly lower than the 5.1 per cent announced during the Interim Budget.

Pankaj Pandey, the head of research at ICICI Securities, found the Budget fiscally prudent. He underscored that the market's long-term prospects remain intact.

"Structurally, it is a positive Budget, but an increase in the long-term and short-term capital gains is a bit of a short-term dampener. We see a very limited element of populism in the Budget. Allocation for most of the welfare schemes has been kept largely the same," said Pandey.

Many experts believe the capital gains tax-related announcements will have a short-term impact on the market. Investors should use market corrections to add quality stocks to their portfolios.

“The hike in capital gains tax rates has understandably caused market jitters, especially because the tax revenue momentum was reasonably good. This unexpected policy shift is likely to weigh on investor sentiment in the short term, leading to higher market volatility than seen in the recent past,” said Alok Agarwal, Head - Quant & Fund Manager, Alchemy Capital Management.

Investors should stay focused on the fundamental strengths of their portfolios. Such short-term market fluctuations may offer opportunities to add strong names to their portfolio," Agarwal said.

Experts advise to stay cautious in the near term

With the Budget behind, the market will shift its focus to quarterly earnings and global cues. Market experts advise investors to be selective in stock selection and focus more on large-cap stocks as the valuation of mid and small-cap segments are high.

"Given the volatility, we advise maintaining a cautious stance. It’s crucial for Nifty to sustain above the 24,200 level to keep a positive outlook; otherwise, profit-taking may intensify," said Ajit Mishra, SVP- Research, Religare Broking.

Mishra advises traders to adopt a hedged approach and favour defensive sectors such as FMCG, pharma, and IT for long trades. He advises avoiding overbought themes like defence, railways, and select PSUs, and using any recovery to reduce exposure in loss-making trades.

Shrikant Chouhan, the head of equity research at Kotak Securities, pointed out that the market fell below the 20-day SMA (simple moving average) due to sharp intraday selling, but it eventually found support near 24,100/79,225 and bounced back sharply.

As per Chouhan, for day traders, the 20-day SMA, or 24,315/79,800, will now act as the trend decider.

"As long as the index is trading above this level, the pullback formation is likely to continue. On the higher side, the market can move towards 24,600/80,800 levels. On the dismissal of 24,650/81,000, we could see the market moving towards 24,850-25,000/81,600-82,000," said Chouhan.

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