Why Nifty fell to 3-week low after hitting new highs

Market speculation about changes to capital gains taxes on stocks, coupled with ongoing election jitters, sent India’s benchmark stock indices to their lowest level in three weeks before Finance Minister Nirmala Sitharaman dismissed what she called “pure speculation”.

The Nifty50 opened higher on Friday, hitting an intraday record of 22,794.7 points, before ending the day in the red. India’s VIX index, the fear gauge, ended 9% higher on Friday, reflecting increased market volatility.

Markets have started to get nervous as investors are pulling out some of their money ahead of and during the ongoing national elections. Over the past month, the Nifty50 and the S&P BSE Sensex have remained virtually unchanged, suggesting a cautious sentiment among investors.

But Friday’s profit-taking was mainly triggered by talk of changes in the treatment of capital gains on stocks after the election results, further depressing investor sentiment.

“On Friday, rumours of adverse changes in the Short Term Capital Gains Tax (STCG) after the formation of the new government and some cooling in the NDA alliance’s victory margin triggered a mild sell-off,” said Deepak Jasani, Head of Retail Research at HDFC Securities Ltd.

In a tweet after market hours, Sitharaman said the rumours were “pure speculation”.

Currently, the short-term capital gains tax is 15% for shares held for less than 12 months, and long-term capital gains are taxed at 10%.

A flood of nervousness

Foreign portfolio investors, or FPIs, sold shares with a provisional net worth ₹2,391.98 crore on Friday, while domestic institutional investors, or DIIs, bought in net ₹690.52 crores, helping the market recover to some extent.

Both the Nifty and the Sensex fell 2% from their daily highs.

The Nifty50 index ended down 0.8 per cent, or 172.35 points, closing Friday’s trade at 22,475.85 points, while the S&P BSE Sensex ended down 1 per cent, down 732.96 points, at 73,878.15 points.

Overall, there were also some winners in Friday’s market, with Coal India Ltd’s stock led the Nifty50 pack with a gain of around 5%.

Investors are not only cautious about rising valuations, but also have many other reasons to be wary: the outcome of the ongoing general elections, geopolitical tensions, soaring crude oil prices, rising inflation and the postponement of rate cuts in the United States.

Friday’s drop, however, was mainly due to the fall in shares of Reliance Industries Ltd, HDFC Bank Ltd and Larsen & Toubro Ltd.

“It is not surprising to see profit-taking near record levels,” said Gaurav Dua, senior vice president and head of capital markets strategy at Sharekhan by BNP Paribas. “But if you look at the bigger picture rather than one-day moves, markets appear to have slipped into a consolidation zone over the last two months.”

The benchmark Nifty index remained within a narrow range of 1,000 points, i.e. 21,800-22,800, he said.

That said, Dua added that markets tend to experience a few minor corrections ranging from 5-10% every year, but such declines are an opportunity to buy quality stocks at more reasonable prices.

Jasani of HDFC Securities said that while minor corrections ahead of the election results can be expected, any major correction would be the result of major disappointments in quarterly results of major companies or due to adverse global developments.

“If the election result is as expected, we can expect a slight rally followed by a period of profit-taking until further monetary policy announcements are made,” he said. “On the other hand, if the margin of victory is much lower than expected, then markets could immediately see a sell-off.”

In the last six months, the Nifty50 and Sensex have risen by 17% and 15% respectively.

“Overall, there is a feeling that most of the expectations have been disappointed, leading to a profit-taking trend in the market,” said Nitin Rao, managing director, InCred Wealth.

The American Postman

There are also some key data coming out of the US that will determine the path the US Federal Reserve takes in terms of rate cuts this year, he added. “Investors might have wanted to lock in their profits and take out some of their gains before this event,” Rao said.

Added to this is a sense of caution in global markets that has spilled over to Indian equities.

Globally, caution remains in order due to the fragile situation in West Asia. Sentiment also remained subdued due to higher than expected inflation and high oil prices.

This has translated into a notable rise in the dollar index, US bond yields and gold prices, Kotak Securities said in a report. “The combination of Q4FY2024 numbers so far and FPI outflows for India in April 2024 could extend the consolidation,” it said.