MUMBAI: Benchmark indices witnessed the steepest single-day fall in more than a year on Friday as stricter tax rules for stock investments and the easing of fiscal deficit targets unnerved investors.
The selloff in developed bond markets — mainly in the US — accentuated the nervous undertone in equities as investors kept a wary eye on firm oil prices, considered one of the biggest risks to the Indian economy.
The Sensex plunged about 840 points, or 2.3%, to close at 35,066.75 while the Nifty declined about 256 points, or 2.3%, to end at 10,760.60. The fall was the worst since November 11, 2016, when the benchmarks fell over 2.5% each.
The broader market witnessed a deeper selloff as domestic investors rushed to dump mid- and smallcaps, the best performers in the market rally since September 2013. The BSE Midcap index fell 4% to 16,574.70, the most since August 2015. The BSE Smallcap index fell 4.65% to 17,847.53, the most since November 2016.
Friday's crash wiped off Rs 4.6 lakh crore from the market value of listed Indian stocks.
"A combination of global market volatility, imposition of longterm capital gains tax and dividend tax on mutual fund schemes coupled with nervousness caused by sharp rise in bond yields weighted on the market," said Abhay Laijawala, head of research at Deutsche Equities India.
On Friday, foreign portfolio investors bought shares worth Rs 950 crore, as per provisional data, while domestic institutional investors sold shares worth Rs 508.8 crore.
FPIs have bought shares worth about Rs 15,100 crore so far this year while domestic institutional investors have net sold shares worthRs 468 crore during the period.
Bajaj Auto led the losses on the Sensex with a fall of 4.9% to Rs 3,242.60, followed by Axis Bank, Maruti Suzuki India, and Reliance Industries, which fell 4.1-4.3%.
Worries About Govt Spending
Finance minister Arun Jaitley on Thursday said long-term capital gains of over Rs 1 lakh will be taxed at 10% without benefit of indexation.
In his last full Budget before next year's general election, Jaitley stepped up government spending in rural areas while the fiscal deficit target for FY19 was pegged at 3.3% of GDP against an earlier target of 3%.
"In the short term, there will be pain as there are worries about increasing government spending. Long-term capital gains tax is a concern, but the bigger worry is the deficit and extra spending by the government," said Nirmal Jain, chairman, IIFL Holdings.
Analysts said the government's moves may add to inflationary pressure at a time when retail inflation is at a multi-month peak. Consumer price index (CPI)-based inflation for December rose 5.21% and was at a 17-month high.
Market experts said the future direction will be determined by global volatility. Bond markets in the US and Europe have come under pressure in 2018 amid concerns that central banks will start unwinding their monetary stimulus at a faster pace because of economic revival. The 10-year US treasury yield has climbed to the highest since April 2014. Worries about rising bond yields in the US impacted sentiment in Asia and Europe.