Indian Stocks Caught In Tug-Of-War Between Domestic And Foreign Flows Amid Tax Tweak

Indian equities have been caught in a tug-of-war between selling by foreign institutions and domestic inflows, after a recent tweak in the capital gains tax to curb the frenzy in the $5.33-trillion stock market.

Global funds have sold over Rs 10,700 crore worth of stocks after the Finance Minster hiked the short and long-term capital gains tax along with the securities transaction tax.

This was done after warnings piled from the markets regulator and the government to channel retail flows into productive vehicles over the derivative market.

Finance Minister Nirmala Sitharaman proposed to hike the long-term capital gains tax from 10% to 12.5% and the short-term capital gains tax from 15% to 20%. The STT on options contracts will increase from 0.062% to 0.1% and the same for futures contracts will rise from 0.0125% to 0.02%.

During the month so far, overseas investors pumped in the highest monthly inflows for the year, having pocketed capital goods, and automobile stocks in the run-up to the Union Budget. It remains to been which sectors these funds have sold in, the last three days.

In the meantime, the target audience for whom the tax tweak was intended, showed no signs of pessimism as they have been net buyers of equities worth over Rs 7,000 crore since the budget.

"Will traders withdraw or reduce trades because the costs have increased? In my opinion, it is a formal no," market veteran CK Narayan told NDTV Profit.

Weak global cues and the expectation of rate cuts in the US are also prompting foreign institutions to book profit and hold on to cash, according to experts.

FII flows have been inconsistent, largely due to the outperformance of other emerging and select developed markets, according to Ajit Mishra, senior vice president of research at Religare Broking Ltd. "Besides, we can see the recent selling as profit taking as markets were overbought."

Any kind of knee-jerk reaction from surprises like hiked capital gains taxes and STT have accentuated the selling of hot money that comes into the Indian market, said Kranthi Bathini, director of equity strategy at WealthMills Securities Pvt.

The markets are not going to see any cool-off post the tax tweak, Bathini said. "If you see the capital gains taxes with any other jurisdiction, the Indian market is much more favorable."

This (tax tweak) is not the primary reason as domestic and the US markets are in consolidation phase, Bathini said. "During these times some rub-off impact will be on Indian markets."

The US markets have been on shock and continued their decline after a disappointing start to the earnings of the technology and artificial intelligence companies that led the rally in the first half of the year. The less than expected earnings of the tech-stock overshadowed the resilient economic print.

Investors are also changing focus amid the rate cuts looming for the US by the Federal Reserve along with a soft landing of the economy. "The recent polls indicate 100% possibility of rate cut, which is also adding to the fall," Mishra said.

India's benchmark indices—the NSE Nifty 50 and the S&P BSE Sensex— have risen 12.3 and 11%, respectively in the year so far, making them the fifth and sixth best performing Asian indices.

Foreign investors would probably be on cash as Indian markets remains one of the favourite markets for foreign investors in the medium to long term, Bathini said.