P Chidambaram surprised the markets by imposing a transaction tax on all purchase deals, robbing the day traders of their bread and butter, and the markets of their liquidity. The week began on a cautious note and remained range-bound till Thursday when the double-whammy was delivered in the form of a transaction tax and an increase in excise duties for the steel sector. A few positives also emerged like the abolition of long-term capital gains tax and short-term capital gains tax being fixed at 10 per cent, but these were not enough to lift market sentiments. As a result, equity markets went into a tailspin on Budget day, but recovered quickly on Friday, as news filtered in that the FM was open to discussion on the issue of the transaction tax and also because after Thursday's panic reaction to the Budget some of the stocks had become very attractive. Reflecting this sentiment, the BSE Sensex moved up by 1 per cent and the Nifty by almost 1.5 per cent. The broader indices like the S&P CNX 500 inched up by 0.2 per cent while the CNX Mid Cap 200 fell by 0.7 per cent.
Trading volumes showed the widest fluctuations. The combined average turnover on both BSE and NSE was 1.8 per cent higher, but it was masked by the fact that it was almost Rs 9,300 crore on Budget Day. But following the levy of a transaction tax of 0.15 per cent on all purchase deals, the combined volumes dipped to Rs 3,400 crore. Perhaps, this is a clear indication of the uncertainty shrouding the markets as a result of this proposed tax.
FIIs were net buyers for the week increasing their exposure by almost Rs 280 crore especially on Friday when they increased their net investments by Rs 148 crore. The carnage on Thursday had made some of the valuations attractive and FIIs took advantage of this. Mutual funds too remained net buyers till Thursday at Rs 32.41 crore but some of the provisions in the Budget have cast a serious doubt on the viability of the mutual fund industry in future.
Among sectoral indices, the BSE IT Index fell 3.25 per cent through the week amidst rumours that the government may decide to tax the IT sector and then again in the general downtrend witnessed on Thursday. The BSE Healthcare Index gained 2.6 per cent with the pharma heavyweights like Dr Reddy's, Ranbaxy and Cipla doing well. In the FMCG sector, the biggest gainer was ITC, buoyed by the government's decision not to tax it further and the BSE FMCG Index gained 3.6%. The BSE PSU Index fell by over 2 per cent following the steep fall registered in oil PSUs ONGC, HPCL and BPCL. This was on the back of the government's decision not to extend any further budgetary support to the oil PSUs to ease their subsidy burden. The Banking Index fell 2.38 per cent with growing fears that the Centre's decision to increase credit supply to the agriculture sector would lead to an increase in banks' non-performing loans.
OUTLOOK
The markets wait for some clarification on the transaction tax. If this tax is not rolled back or amended, it threatens to rob the markets of their liquidity. In such a scenario, will the finance minister be able to realise his dream of inflating his coffers? Maybe it's time for a rethink but the crucial question will be whether intelligent people will be magnanimous enough to accept their mistakes and correct them as soon as possible.
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