When Will Indian Stock Market Strike Back?

March 11, 2018: Indian stock market shed 2600 points in the recent days. Many reasons are attributed to the steep fall. Looming trade war triggered by the unilateral declaration of hike in import duty by the US on steel and aluminum, woes in Indian banking system, expected increase in the US interest rates etc are reported to be behind the run down on the market.

There can be other reasons as well, but not that very significant. Ordinarily, when the BJP government entered the red bastion in Tripura and cobbled up governments with newly found partners in neighbouring states like Nagaland and Meghalaya, the stock market should have zoomed. Instead, it nose-dived, creating consternation among the investors, particularly the retail investors.

It is important to analyze the undercurrents that might have upset the market to reverse the bull-run. After equity market, the foreign portfolio investor (FPI)are pulling out from the debt market. According to NSDL, FPI outflow from debt market in March 2018 is Rs(-) 4796 crore and equity outflow works out to Rs(-) 334 crore.

Debt and equity outflow for the month of March 2018 is a meaty (-)Rs 5132 crore. If one takes the data since 1st January 2018 to till date, the inflow of FPI under debt works out to a Rs 3473 crore and equity Rs 2410, aggregating to Rs 5852 crore. The moot point is when the year ends some more than nine months from now, where will be the stock market? Incidentally, that is the time when everyone will speculate about the next government in power.

It is i8nstructive to have a look at the FPI inflows in the month of September, October, November and December 2017, the months immediately preceding the months under review. Barring December 2017, when the FPI investment was shaved off to the extent of (-)Rs 5883 in the equity market (debt market was positive), the rest of the months showed a positive growth in the FPI inflows.

The total inflow for the months from September –December 2017, was to the extent of Rs 200,048 crore. Equity flow was Rs 51,252 crore (Sept-Dec 2017) and debt flow Rs 148,808 crore.

Some of the investors this correspondent spoke said that Budget 2018-19 was a turning point when new direct tax proposals coupled with import duty hike for certain items, particularly electronic goods, were announced. It did not go well with the FPIs, who never expected in their weirdest dreams that the government would re-introduce the long-term capital gains tax, though in a modified form.

A capital market is known for getting swayed by perceptions, emotions, illusory exuberance etc. Luck would have it, this time around, the yield of bonds in US market went up, putting extra pressure on the FPIs to withdraw from the Indian market.

Now the trillion dollar questions is: what next to bring back the capital market on a rail, particularly when the oil prices are gradually creeping up, tax structure is seemingly in a quandary against the backdrop of hitches in the GST operations and collections, the corporate sector is still largely in a no-profit zone.

Some pragmatic steps have to be taken by the government. Foremost is the rollback of long-term capital gains tax followed by a partial rollback of higher import duty on certain items.

This could be done by the government while moving the government amendments to the general budget when the discussions come up in Parliament. Secondly, the GST network should be streamlined to make the procedures and filing of returns taxpayer friendly. Most importantly, the government should prepare a strategy how to make Indian financial institutions like LIC, GIC etc active players in the capital market. Before the advent of the FPIs in the Indian scene, how many would know financial institutions were the active players in the market.