With the Wall Street plunging more than two per cent on Friday, Indian stock markets — already hit by Budget proposals on long-term capital gains tax and fiscal slippages — are bracing for more turbulence this week which could prolong the recovery.
Concern over the impact of a tightening job market on the prospects for inflation and a surge in bond yields sent investors fleeing US equities on Friday, with the Dow Jones Industrials Average falling almost 666 points, its biggest daily percentage loss in 20 months. The Wall Street fall happened after Indian markets closed the day’s trading.
It was the biggest daily point fall in the Dow since December 2008 during the financial crisis.
On February 2, a day after the Budget presentation, the Sensex crashed 839.91 points, or 2.34 per cent to close the day at 35,066.75 as investors cut their equity positions. The broader NSE Nifty fell below the 10,800-mark by plunging 256.30 points, or 2.33 per cent, to 10,760.60 at close. 10,736.10.
The major factor that led to the big correction was the Budget announcement of imposition of long-term capital gains tax on equity, introduction of a tax on distributed income by equity oriented mutual funds and fiscal slippage. Fund flow to the equity and mutual fund schemes is likely to come down with the 10 per cent long-term capital gains tax, experts said. On February 2, the small-cap index fell 4.65 per cent and mid-cap index by 4.03 per cent. These stocks had run up to sky-high levels in the last one year. The BSE Sensex had gained 1,908 points or 5.60 per cent, in January 2018 and 27.9 per cent in full calendar year 2017.
After Friday’s rout, Wall Street’s three major indices logged their biggest weekly losses in two years, after closing at record highs the previous week. The S&P 500 and Dow saw their worst weeks since early January 2016 while Nasdaq had its worst week since early Feb 2016.
Experts said people are starting to really get increasingly uncomfortable with the rapid rise in interest rates that they have seen and the uncertainty of how that is actually going to start to play out relative to competition for stocks. Bond yields have been rising in India as well, raising the spectre of a rise in interest rates in the banking system.
In the US, overnight stock price losses accelerated after the US Labor Department reported employment rose more than expected in January with the biggest wage gain in more than 8-1/2 years. “The picture of workers commanding higher salaries fueled expectations that inflation is on the rise, which could prompt the Federal Reserve to take a more aggressive approach to rate hikes this year,” said a report.
The development caused the 10-US year Treasury yield to surge to 2.8450 per cent the highest since Jan. 2014, which could make returns on Treasuries look more attractive relative to stocks. In India, the deficit numbers unnerved the bond market with the yield on 10-year benchmark government security (old) rising by 20 basis points to 7.80 per cent and the 10-year benchmark security (new) climbing 17 basis points to 7.60 per cent on February 1 (Budget day).
“Volatility in bonds and rupee over fiscal slippage and stocks’ churn ahead of FY19 over LTCG prompted sharp pull back in stocks. Uncertainties over the execution of spendthrift budget without tampering fiscal deficit target have fuelled the current volatility and may compel the RBI to take a more hawkish stance in the upcoming monetary policy meeting. Weakness in global peers and a fall in the rupee index also added to the misery of the domestic market,” said Anand James, Chief Market Strategist, Geojit Financial.