BackWhy the Nifty dropped to 3-week low after hitting fresh highs
A sell-off was triggered by rumours of changes to the capital gains treatment of equities, which finance minister Nirmala Sitharaman trashed as “pure speculation”, although after the markets closed
PremiumMarket chatter on changes to capital gains taxes on equities—piling on to prevailing election jitters—dragged India’s benchmark equity indices to their lowest in three weeks, before finance minister Nirmala Sitharaman dismissed what she called “pure speculation".
This, after the Nifty50 opened higher on Friday, clocking a record intraday high of 22,794.7 points, until it ended the day’s trading in the red. The India VIX index—the fear gauge—ended 9% higher on Friday, indicative of the heightened volatility in the market.
There has been some anxiety in the market with investors taking some money off the table ahead of and during the ongoing national election. Over the past month, both the Nifty50 and the S&P BSE Sensex have remained almost unchanged, suggesting a cautious sentiment among investors.
But profit-booking on Friday was mainly triggered by rumours of changes to the capital gains treatment of equities post the election results, souring investor sentiment further.
“On Friday, rumours of adverse STCG (short-term capital gains) tax changes post the formation of new government and of some cooling of the margin of victory by NDA alliance caused a minor selloff," said Deepak Jasani, head of retail research at HDFC Securities Ltd.
In a tweet after market hours, Sitharaman said the rumours were “pure speculation".
Currently, the short-term capital gains tax is 15% for equities held for less than 12 months, and long-term capital gains are taxed at 10%.
A deluge of jitters
Foreign portfolio investors, or FPIs, net sold shares worth a provisional ₹2,391.98 crore on Friday, while domestic institutional investors, or DIIs, net purchased ₹690.52 crore, helping the market recover to an extent.
Both the Nifty and the Sensex fell 2% from their day highs.
The Nifty50 index settled lower by 0.8%, or 172.35 points, closing Friday’s trading at 22,475.85 points, while the S&P BSE Sensex ended 1% lower, down by 732.96 points, at 73,878.15 points.
All said, there were also some winners in Friday’s market, with Coal India Ltd’s stock leading the Nifty50 pack with a gain of about 5%.
Investors are not just turning cautious about valuations becoming pricey but have a deluge of other reasons as well to be wary of—the outcome of the ongoing general election, geopolitical tensions, soaring crude oil prices, mounting inflation, and delayed rate cuts in the US.
Friday’s sell-off, though, was mainly driven by a fall in the shares of Reliance Industries Ltd, HDFC Bank Ltd, and Larsen & Toubro Ltd.
“It is not surprising to see some profit-taking near the all-time high level," said Gaurav Dua, senior vice-president and head, capital market strategy, Sharekhan by BNP Paribas. "But if we look at the bigger picture rather than one-day movement, the markets seem to have slipped in a consolidation zone in the past couple of months."
The Nifty benchmark has stayed in a narrow range of 1,000 points—21,800 to 22,800, he pointed out.
That said, Dua added that markets tend to play out a couple of minor corrections ranging from 5-10% every year, but such declines are an opportunity to buy quality stocks at more reasonable prices.
Jasani of HDFC Securities said that while minor corrections ahead of the election results can be expected, any large correction would be a result of major disappointments over the quarterly results of key companies or because of adverse global developments.
“If the election outcome is on lines of expectations, then one can hope for a small rise followed by a bout of profit-taking till fresh policy announcements begin," he said. “However, if the margin of victory is much short of expectations, then the markets can witness a sell-off straightway."
Over the past six months, the Nifty50 and the Sensex have risen by 17% and 15%, respectively.
“Overall, there is a sense that most expectations have been discounted, resulting in an inclination for profit-booking in the market," said Nitin Rao, chief executive, InCred Wealth.
The US factor
There are also a few key data points that are to be released in the US that would determine the path the US Federal Reserve would take in terms of rate cuts this year, he added. “Investors might have wanted to secure their profits and take some gains off the table before this event," Rao said.
Adding to this is a sense of caution in global markets that has spilled over into Indian equities.
Globally, caution lingers due to the fragile situation in West Asia. Sentiment was subdued also because of higher-than-expected inflation and elevated oil prices.
This has been evident in notable upticks in the dollar index, US bond yields, and gold prices, Kotak Securities said in a report. “Mix Q4FY24 numbers till date and FPIs outflows for India in the month of April 2024 could extend the consolidation," it highlighted.
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