Markets may gain 2% on rollback of surcharge

MUMBAI: Stock markets could surge as much as 2% on Monday, cheering the government’s rollback of the additional surcharge on foreign portfolio investors registered as trusts and measures to inject liquidity into the system. The US-China trade war and hints by the US central bank on the interest rate direction on Friday night will determine whether the gains will be sustainable next week.

Finance minister Nirmala Sitharaman’s decision after trading hours on Friday is expected to provide relief to several big-ticket FPIs that actively participate in the cash markets.

“The market will open up at least 1-2%. Shorts will get squeezed in autos, metals, real estate companies and banks,” said Gautam Shroff, co-head, Edelweiss Institutional Equities. “The Asian region might still be under pressure because of US-China trade issues, but India will outperform.”

Key Indian stock indices pared losses for the week on Friday ahead of the Sitharaman’s press meet. The benchmark Sensex gained 0.6% to 36,701.16, reversing an intraday decline of 1%. The Nifty index advanced 0.8% to 10,829.35.

FPIs provisionally net sold Indian stocks worth Rs 1,737.2 crore, while domestic institutional investors net bought local stocks worth Rs 1,548.5 crore.

The enhanced surcharge on FPIs announced in the Union Budget on July 5 had led them to withdraw more than Rs 22,500 crore from local equities. India’s market cap has eroded by Rs 14.7 lakh crore since budget day.

“This is a very positive development, which would give a fillip to the capital markets. Tax rates for FPIs will come down by up to 7%, back to the pre-budget levels, and this removes the anomaly created by the Budget 2019,” said Rajesh Gandhi, a partner at Deloitte India.

For FPIs, which have income of more than Rs 5 crore in a year, the effective short-term capital gains tax rate would come down to 12% against 14.25% after removal of the surcharge. The long-term capital gains tax rate would decrease to 18% from 21.4%. However, the tax on business income will continue to be 42.74% against 35% before the budget.

Experts said that while the announcements will stem the bear trend in the domestic stock market, investors will also factor in the impact of the latest round of escalation in US-China trade tensions after Beijing hiked tariffs on $75 billion of US products.

The finance ministry late on Friday clarified that the surcharge relief will be applicable to equity derivatives trades by FPIs. Category I & II Alternative Investment Funds dealing in unlisted securities will, however, attract the tax surcharge. “The only disappointment is that the surcharge is still applicable on business income on derivatives,” said Andrew Holland, CEO of Avendus Capital Alternate Strategies. “The announcements will stem the negativity in the stock market.”