For India’s equity investors, a return of bear market like scenario will now become a distant possibility after Finance Minister Nirmala Sithraman’s unveiling of a massive stimulus package to boost corporate balance-sheet and capital expenditure, experts told BusinessLine .
The Sensex gained 1,900 points and Nifty nearly 600 points or 5.32 per cent each to mark their most significant single-day gains in almost a decade, but market players are expecting the rally to continue as foreign portfolio investors (FPIs) return to the street with a bang in coming weeks.
FPIs had dumped stocks worth around $4.5 billion in the recent weeks, but such aggressive selling pressure could now subside and the path for Nifty index to move above 11,600 levels seems a possibility on technical charts, experts say. Interestingly, provisional data showed that FPIs only purchased stocks worth a measly ₹35 crore in the cash segment. It was buying from domestic institutions worth ₹3,000 crore that pulled up a massive rally.
Read:Government slashes taxes for corporate, new manufacturing firms
“Tax cuts will change markets. Further rally of 300-400 points for Nifty is expected. Buying will continue next by FPIs and markets will be way higher when PM Modi returns from his US tour. New highs for the indices too are likely in the near future,” said Rahul Arora, CEO, Institutional Equities, Nirmal Bang.
According to analysts, Friday’s announcements will brighten prospects of a private bank and durable consumer stocks among others, which are now expected to outperform the broader markets, analysts said.
Investor sentiment was at its nadir as economic slow-down woes took its toll and markets were reeling under a heavy build-up of short positions that came close to record levels. But little did anyone knew that Sitharama’s tax bonanza to corporates, especially manufacturing sector, would lead to a ₹5 lakh crore lift for equity investors within minutes.
Effective tax rate for corporates will fall to 25 per cent from the current 35 per cent. For those starting production in new manufacturing plants before 2023, the effective tax would be 17.1 per cent including surcharge. Lowering of tax for manufacturers puts India in direct line of competition with China.
“The tax cuts are a game-changer for Indian corporates. This will help India capitalise on industries and investments moving out of China,” said Sachichidanand Shukla, chief economist, Mahindra Group.
“Markets should not expect any overnight magic. We now need a big divestment and asset monetization drive. Once outlook for government revenue and growth stabilises, there is a case for reduction in individual income tax, which would spur demand and complement the current moves. We need lower tax rate sans exemptions and rebates,” Shukla.
A research note from broking house Nirmal Bang said tax cuts were a useful tool in boosting economies even if temporarily and the US was the recent example of this, which reduced the corporate tax rate to 21 per cent in 2017.