Ambareesh Baliga's quick take on the markets after the increase in STT on futures trading to 0.05% (0.02% earlier) and on options to to 0.15% (0.1% earlier)
Soon after Finance Minister Nirmala Sitharaman announced the proposal to increase the Securities and Transaction Tax on futures trading the Indian equity markets went into a tailspin around 12.10 pm and tanked more than 2.5% before staging a smart comeback even though still down by 1.2% by 12.45 pm.
Independent equity analyst Ambareesh Baliga offers his quick take on the market's reaction and the negatives and the only positive for equity markets.
According to Baliga the after effect of Budget proposals remain in force only for the next ten days at the most after the Budget announcement.
Key Points
- FIIs expected capital gains relief and lower STT, but budget raised F&O STT, spooking markets and worsening taxation concerns overall.
- Budget prioritised pharma, medical tourism and tariff-hit sectors, while MSME and AI allocations remained token, signalling limited growth commitment overall.
- Buyback taxation clarity was the sole positive; FII sentiment stays negative, but long-term investors should hold as impact fades quickly.
According to experts, markets are likely to remain choppy for the rest of the session till 3.30 pm even though they have staged a smart recovery from its post noon crash of 2.5% to just 1.05% at around 1 pm.
What were the expectations regarding taxation in the budget?
FIIs were expecting an increase in the capital gains exemption amount and a reduction in STT (Securities Transaction Tax). However, instead of reducing STT, there was an increase in STT for F&O (Futures and Options), which the government implemented to discourage excessive F&O trading.
Markets seem to have been spooked soon after this particular proposal?
The market reacted negatively soon after the STT increase announcement was made.
While F&O provides liquidity to markets, in the longer term, higher STT could be beneficial as it may prevent too many inexperienced traders from entering the F&O segment. However, to genuinely promote investment, the government should have reduced taxes on regular investments.
What was the major issue for FIIs (Foreign Institutional Investors)?
The major issue for FIIs was taxation. This was considered a great opportunity to resolve FII taxation concerns and encourage foreign investment, but the budget failed to address this adequately.
What sectors did the Budget focus on?
The budget focused more on pharma, medical tourism, and sectors affected by (US) tariffs. While touching upon tariff-affected sectors was positive, much more could have been done.
What was the only positive for markets in this Budget?
The only direct positive for markets was the taxation treatment of buybacks, which has been sorted out.
How significant were the allocations for MSME and AI?
The allocations were considered inadequate -- Rs 10,000 crores for MSME and Rs 25 crores for AI. The AI allocation, in particular, is an amount a small fund would invest, suggesting these are merely token gestures rather than substantial commitments.
How long will the Budget's impact on markets last?
Historically, over the last 10 years, Budgets haven't affected markets beyond 10 days, with only two exceptions. The current negative impact is expected to last just a day or two before being forgotten.
Is this Budget negative for FIIs?
Yes, it's clearly negative for FIIs as there were expectations of favourable measures for both foreign institutional investors and resident investors, which were not met.
What should investors do now?
Long-term investors should simply hold their positions and not make hasty decisions based on the Budget.
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