Is the govt to be blamed for the stock market turmoil?

On Tuesday the stock exchange closed on a grim note. Before it closed, the BSE Sensex showed 1.61% fall of 561 points and Nifty fell by 168 points, or 1.58%. At the time of closing, Sensex was at 34,195 and Nifty was at 10,498 points. This slump meant a loss of ₹3 lakh crores for the investors.

The share market opened with a huge fall on Tuesday. Sensex showed a slump of 1,300 points and Nifty about 386 points, as the started and the investors had to bear a loss of about ₹5 lakh crores.

The finance ministry immediately became cautious amid desperate selling and slump on the market. In fact, various budget announcements, particularly of the Long Term Capital Gains Tax, are believed to be the cause of this huge fall. But Finance Secretary Hasmukh Adhiya repeated on Tuesday that the slump in the market is not caused by the budget, but because of the global markets.

He opines that the market did not fall this low on the day the budget was presented when the government announced Long Term Capital Gains Tax.

First, let us have an idea of how much the investors have lost because of this slump in the market. The investors lost about ₹3 lakh crore on Tuesday. On Monday , the investors faced a loss of about ₹1 lakh crore. But they faced the biggest loss on February 2, a day after the budget was presented as about ₹4.5 lakh crores of the investors money was wiped out. Overall, the investors have lost almost ₹10 lakh crores after the budget was presented at the beginning of the month.

The mood of the market after the budget was presented can be understood by the table given below:

Now, we come to the question - What are the reasons behind this slump in the market? Is it temporary, as the government is claiming? Is there a major issue in our market, economy or working style?

There are many reason for the downfall in domestic stock markets. Some are domestic, and some global. The government has said that the global market is responsible for the downfall in the market on Tuesday. This is accurate to an extent, but there is a hidden fact in this statement which points out that our stock market is not strong, but it is dependent on the activity of the global market.

If we accept the government version, the downfall in the American stock market affected stock markets worldwide badly.

But we must understand as to why did American Stock Exchange fall? American Fed is going to increase interest rates. There is uncertainty in policy matters of America since Jerome Powell has become the Chairman. The increase in interest rate was obvious after unemployment rate gone down to 4.1 per cent in January. Due to this, benefit from Bond’s yield has gone up. The bond is issued by the government, so it is taken as secured investment. In such a situation foreign investor (Institutional also) who used to take money on lower interest rates and invest in Indian Stock market, which was responsible in surge in stock market, will now turn their back to bond market.

The reason for this is that they will not get debt on low interest rates and Indian Stock market will be burdened with long term capital gain tax. So, they feel safe in withdrawing their money.

This was the foreign reason, now let’s talk about the domestic reason. There is a comeback of long term capital gains. That means there are various kinds of tax in the business in stock market. Apart from long term capital gains, there is short term capital gains and securities transaction act. Due to this, the domestic investors are taking out their money and putting it somewhere else. The domestic investor is seeing gold and real estate investment as being more beneficial.

Apart from this, the market is worried about fiscal deficit. The government has said in the budget that they spent more than the fiscal deficit limit and its affect could be seen on the market now.

One more domestic reason responsible for the downfall is the RBI’s monetary review. The RBI started the meeting of Monetary Policy Committee from Tuesday, with the result expected on Wednesday.

Overall, the expectation is that the RBI can tighten its monetary policy. It also has several reasons. The government has increased the target of fiscal deficit in the current financial year to 3.5 per cent. Also, the increase in Minimum Support Value (MSV) has speculated a danger of price rise. There is a possibility that the government will increase interest rate in the coming days.

In such a situation, investors will be more cautious. Tuesday’s downfall maybe because of global market, but the reality is that our market has a lose foundation, too. If the experts are to believed, then soon market will reach its original level of around 30,000.

(Translated into English by Zaheeb Ajmal and Pragati Saxena).