The rupee slumped to a 20-month low on Thursday and the equity markets took a hammering yet again as Dalal Street reacted sharply to anxieties over retrospective taxation of foreign funds, slowing reforms, costlier crude oil and concerns over muted corporate earnings.
The market free-fall put a question mark over the BJP-led NDA government’s ability to push through key reforms including the contentious land acquisition bill, besides its handling of an agrarian crisis precipitated by unseasonal rains.
The BSE Sensex closed at its lowest level in nearly six-and-half-months, closing at 118.26 points or 0.44% down, while the broader Nifty fell 0.49%. The Sensex closed at its lowest level since October 21, 2014, while the NSE index finished at its lowest level since December 17, 2014.
In the last 15 trading sessions, the 30-share BSE Sensex has tanked more than 2,000 points or nearly 8%, half of this fall coming in the last two days alone. On Thursday, it tanked more than 200 points during intra-day trade following up on the previous day’s 723 free-fall.
The broader 50-share NSE Nifty fell nearly 80 points breaching the 8,000 mark intra-day.
After a period of relative stability, the rupee too cantered past the 64 to a dollar mark—a 22 month low. On Thursday, it fell more than 60 paise and was hovering around 64.20 dollar mark, a level last seen during August 2013, days before the local currency had hit its all time low of 68.85 to a dollar.
Nervous foreign funds continued to sell heavily fearing a mounting tax bill in a sign of waning attractiveness of the Indian market as a hot investment destination.
From a foreign investors’ darling to an economy with irritant tax rules for foreign investors, the turnabout of India’s image has been as rapid as the dizzying heights the currency and equity markets had achieved months after the Narendra Modi-led BJP rode to a landslide election victory a year ago promising to usher in ‘acche din’ (good days).
About 100 foreign funds are reported to have been served with notices to pay taxes over the past years. This has spooked investors although the government has maintained that the notices were for taxes not paid till March 2015.
Finance minister Arun Jaitley in the budget for 2015-16 has proposed to scrap Minimum Alternate Tax (MAT)--a kind of tax on corporate income--on capital gains made by FIIs.
The government has maintained that FIIs were asking for “retrospective exemption” of MAT.
FII selling has been driven by uncertainty over massive minimum alternate tax (MAT) demands the government has made on them.
The Goods and Services Tax (GST) bill was passed in the Lok Sabha on Wednesday, but it still has to clear the Rajya Sabha hurdle. There is also uncertainty over several other bills like the land bill and real estate bill, blocked by an unrelenting opposition in the upper House.
The FII sell-off has set off a dollar outflow, pushing the down rupee’s value.
Besides, crude oil prices have been steadily rising over the last few days, and is now hovering around $67 a barrel, pushing up demand for dollars.
Over the last 12 months, India’s major equity indices had grown about 22%, primarily riding on the perceived expectations of a return to a period of sustained boom.
Companies’ balance sheets, however, show that real recovery may take longer than earlier thought.
The signals from the markets are clear: the payback time has begun. This has shifted the focus to implementation and real and onus will be on the government to go for broke.