Global Market Meltdown, RBI Status Quo And More That Happened This Week

It has been a very volatile week, starting with the Asian markets witnessing the worst crash in recent history, led by the unwinding of the yen carry trade. As anticipated, India's central bank maintained a hawkish stance and kept the key policy rate unchanged, unaffected by the actions of global central banks.

The week also saw the union government revise the long-term capital gains indexation proposal for real estate.

NDTV Profit, in its weekly news wrap every Friday, brings you the mega events across businesses, industries, and countries that have impacted investors' wealth.

Stock markets in major economies faced a reality check after the unwinding of carry trade in the Japanese yen disrupted the year-long rally.

The Bank of Japan, in line with market expectations, hiked its benchmark interest rate to 0.25% from its 0.0–0.1% last week. The markets now expect the BoJ to go for further hikes, which will further strengthen the Japanese currency against the greenback.

Carry trade is a popular concept in the currency market, where investors borrow low-yielding currencies to invest in high-yielding currencies.

The favourite carry-trade currency's rising prompted traders to rush to unwind their long positions in the yen, sparking a global sell-off. Japanese stocks, among other Asian and US markets, faced one of the worst crashes, with multiple benchmarks triggering the lower circuit.

This selloff was further triggered by weak economic data in the US, which increased the recession risk. Economists at Goldman Sachs raised the probability of a recession in the next year to 25% from 15%.

Dalal Street faced the brunt of BoJ's action with the benchmark indices—NSE Nifty 50 and BSE Sensex—plunging nearly 3.33% and 3.32%, respectively, on Monday. The Nifty 50 companies lost about Rs 5.5 lakh crore of investors' wealth during the rout.

The Reserve Bank of India's Monetary Policy Committee kept the benchmark repo rate unchanged at 6.5% for the ninth straight time on Thursday. The central bank continued to remain cautious about inflation amid elevated food inflation.

The MPC also decided by a 4:2 majority to remain focused on the withdrawal of accommodation. Despite the 'hawkish' tone on inflation, economists expect a change of stance in October, followed by the first rate cut in December.

"We expect two RBI rate cuts of 25 basis points each in the current cycle, one in the fourth quarter of 2024 and the other in the first quarter of 2025, taking the repo rate to 6%. Given that growth is strong, we believe there will be an easing cycle, but a shallow one," Pranjul Bhandari, chief economist at HSBC, said.

Here are the key highlights of the June MPC meeting:

• RBI Governor Shaktikanta Das backs the US economic soft landing. Says it's premature to talk about the US recession.

• India's macro fundamentals are robust despite global market turmoil, says Das.

• UPI limit for tax payments increased to Rs 5 lakh.

• RBI is wary of the growth in top-up loans by lenders.

The union government revised the indexation proposal on real estate proposed in the budget last month following public feedback.

The government has moved an amendment to the Finance Bill, 2024, to let taxpayers select either a 12.5% long-term capital gains tax rate without indexation or a 20% rate with indexation for property acquired before July 23.

Finance Minister Nirmala Sitharaman, while presenting the Union budget 2024 last month, announced that the tax on LTCG had been slashed to 12.5% from 20%.

The indexation benefits allowed the seller of real estate to adjust for the impact of inflation when calculating capital gains. "The logic of the budgetary proposal on capital gains tax is that it has to be standardised, simplified and treat all asset classes equally," the Finance Minister said in Lok Sabha.

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The sharp fall in the broader markets on Monday brings into focus the need for downside protection.

Actively managed funds need to both be able to beat the benchmarks during bull runs and also be able to hedge against drastic losses.

Small-Cap Fund Performance

• The Bandhan Small Cap Fund, which had the least fall in NAV in the category, provided the most downside protection, losing less than 4% on Monday.

• The DSP Small Cap Fund also fell by nearly 4%, which is relatively lower than other schemes in the category.

• Other small cap schemes in the top 10 have fallen by nearly 5%, with schemes like Union Small Cap Fund and Bank of India Small Cap Fund losing 4.72% on Monday.

Mid-Cap Fund Performance

• The schemes with the best downside protection saw a 3.7–4.6% fall in their net asset value on Monday.

• The Motilal Oswal Midcap Fund, which fell by 3.7%, had returned about 60% in 2024.

• Schemes like Mirae Asset Midcap Fund and Quant Midcap Fund took a 4.5% fall.