Indian Economic Crisis
Source: Sentinel Assam

We have all known for long that the stock market is very volatile. The prices of stocks would change drastically, even with minute variation in the economy. People investing in such markets have a clear idea regarding volatility.

One such recent example can be extracted from the fall in the stock market after the announcement of the budget. Finance Minister Nirmala Sitharaman presented the union budget, 2019 on July 5th. One of the major clauses in the budget was an increase in the surcharge rates.

The new surcharge applicable to individuals and trusts are as follows:

  • 10% for individuals having a total income between 50 lakhs to 1 crore
  • 15% for those individuals with taxable income between 1 and 2 crores
  • 25% for individuals with income between 2 and 5 crores
  • 37% for individuals having income above five crores.

Once applicable, this would affect the foreign portfolio investments the most.

Within a month of the budget announcement, a lot of foreign portfolio investors (FPIs) pulled out a large part of their investments, approximately 13000 crores as per SEBI. It is the highest amount of pullouts since last October.

The Nifty50 fell 2.54 per cent, and this was the worst weekly performance since May 10 where the index was down by about 3.7 per cent. The most substantial impact was on the small caps.

By August 2, more than 400 stocks of 500 companies of Inc. showed a negative return. Out of the 419 stocks, 59 stocks in the S&P BSE 500 stocks showed a decline in double digits.

Out of these 59 stocks, which dropped more than 10 per cent, 14 stocks saw a decline of 20-50 per cent. These include names such as Sadbhav Engineering, Indiabulls Housing Finance, Dish TV, Indiabulls Real Estate, Vodafone Idea, Care Ratings, and Coffee Day Enterprises and many more. Both Sensex and Nifty declined by around 10%.

The Indian equity market had to face huge sales from foreign investors in the cash segment. Moreover, there are muted corporate results, signs of vulnerability in economic growth as indicated by core data.

Apart from this, the current threat of trade war between the US and China at the global front has made the market more vulnerable. All these led to stocks losing about 15 lakh crores within a month of the announcement of the new budget.

“The market fell beyond expectations and was triggered by the tax on FPIs since the Budget. The market is likely to remain under pressure until further clarity on this comes,” Ashish Nanda, EVP & Business Head, PCG, Commodities and Currency Business, Kotak Securities, told Moneycontrol.

Investors now rely upon government for coming up with some initiative to stimulate the growth of one of the largest economies of the world, i.e. India.

In the upcoming months, we will be able to see whether the Budget proposal to hike the surcharges on income tax for wealthy individuals, including foreign funds which are structured as non-corporate entities, have impacted their interest for Indian equities. Moreover, let’s see how the investor’s trust in the abilities of the government pays off.