Why Is The Market Falling Today? Sensex and Nifty Drop Explained – Forbes

The Union Budget 2024 announcements on July 23, 2024, stumped Indian investors with an unexpected hike in capital gains taxes. The BSE Sensex slipped nearly 1000 points, and the Nifty 50 dropped more than 300 points in intra-day trade before closing marginally in the green.

The Nifty 50 closed at 24,479.05, down by 30.20 points or 0.12%, while the BSE Sensex ended at 80,429.04, 0.091% lower. Here’s a breakdown of what led to the fall in the Indian stock market.

Key Reasons for the Fall in the Indian Stock Market

The budget’s emphasis on fiscal consolidation and deficit reduction may have raised apprehensions about the potential slowdown in economic growth and the availability of liquidity in the market.

Tax Changes: Recent government announcements to enhance revenue generation have introduced hikes in the long-term and short-term capital gains taxes. The long-term capital gains tax has been raised to 12.5% from 10%, and the short-term capital gains tax on certain assets has been increased to 20% from 15%. These changes have prompted investors to book profits, adding selling pressure to the market.

Extended Rally and Profit-Taking: The market’s prolonged bullish phase resulted in stocks reaching peak levels, creating a ripe environment for correction. Investors began to profit by selling their holdings at these high levels, leading to a broad-based decline across sectors. As prices reached new highs, market participants reassessed valuations, leading to a more cautious approach and subsequent selling.

Overpriced Shares: Many stocks in the Indian market have been trading at elevated valuations, which are becoming increasingly difficult to justify based on their fundamental performance. High price-to-earnings (P/E) ratios and other valuation metrics indicate that multiple stocks are overpriced. Wary of these unsustainable valuations, investors began selling off shares to lock in gains, contributing to the broader market decline.

Options Market Influence: The options market also played a crucial role in the recent market movement. A high concentration of call options at various strike prices created an environment where market makers needed to hedge their positions by selling the underlying stocks. This dynamic added downward pressure on the market as option expiry dates approached, exacerbating the decline.

Stocks that Witnessed Significant Fall

Several prominent stocks experienced significant losses, contributing to the overall market decline:

• Hindalco: -3.50%
• Larsen & Toubro: -3.16%
• ONGC: -2.62%
• Shriram Finance: -1.97%
• Power Grid Corp: -1.68%
• Bajaj Finance: -1.54%
• SBI Life Insurance: -1.37%
• Coal India: -1.11%
• SBI: -1.05%

These declines reflect the broader negative sentiment and market downturn.

What Lies Ahead for Investors?

The recent budget announcements have garnered varied reactions from experts across different sectors who believe the Budget will primarily benefit investors-at-large while creating a level playing field across asset classes.

According to T Manish, SAMCO Securities’ research analyst, the revised tax rates under the new tax regime and the increased standard deduction from INR 50,000 to INR 75,000 will lead to significant savings of around INR 17,500 for individuals. This move is expected to benefit companies in the fast-moving consumer goods (FMCG) stocks like HUL, ITC, Dabur, and Nestle, with suppliers such as Polyplex and Uflex being second-order beneficiaries. 

“Additionally, the increased savings are likely to boost inflows into wealth management firms through systematic investment plans (SIPs) and to stock broking companies via brokerage,” says Manish.

Vaibhav Porwal, co-founder of wealth management company Dezerv, believes the changes to the capital gains taxation will ultimately foster a more stable and mature investment environment. “The widening gap between STCG and LTCG rates incentivizes longer-term holdings and aligns to create sustainable wealth. It will also standardize taxation across various asset classes, simplifying investment decisions and promoting patient capital despite short-term market concerns, particularly with Securities Transaction Tax (STT) adjustments in derivatives,” says Porwal.

Vaibhav Gupta, partner at Dhruva Advisors, pointed out that the reduction in long-term capital gains taxes for residents on unlisted shares and real estate contrasts with the increase from 10% to 12.5% for non-residents on unlisted shares, will impact foreign direct investment (FDI) returns. 

“Removing cost indexation on all assets will significantly affect real estate returns. However, Indian promoters selling unlisted businesses will benefit from the 20% to 12.5% tax reduction, equalizing listed and unlisted share sales. The change in capital gains treatment on bonds and debentures to short-term gains taxed at applicable rates and the clarification on share transfer taxability in an offer for sale, with indexation till FY2018, are notable adjustments, said Gupta.

Experts believe investors must focus on the following key elements to steer through the volatility storm: 

• Diversification: Maintaining a diversified portfolio to mitigate risk.
• Valuation Awareness: Being mindful of stock valuations and avoiding overpriced stocks.
• Market Dynamics: Understanding the influence of market instruments like options on stock prices.
• Long-term Perspective: Keeping a long-term investment horizon to ride out short-term volatility.

While challenging, the current market downturn can present opportunities for savvy investors to buy quality stocks at more reasonable valuations.

Bottomline

Today’s stock market decline can be attributed to a mix of factors that have unsettled investor sentiment. Key among them are:

1. Revised Tax Rates: The Union Budget’s announcement of revised tax rates, particularly the increase in Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) taxes, has led to a bearish market reaction. This shift has created uncertainty among investors, prompting a sell-off.
2. Changes in Securities Transaction Tax (STT): Adjustments in STT, particularly concerning derivatives, have impacted the profitability of frequent traders. This has contributed to the overall negative market sentiment.
3. Impact on Foreign Direct Investment (FDI): The increase in long-term capital gains tax for non-residents on unlisted shares from 10% to 12.5% is expected to affect FDI returns, leading to concerns about reduced foreign investment inflows.
4. Removal of Cost Indexation: The elimination of cost indexation on all assets is anticipated to significantly affect real estate returns, causing a ripple effect across related sectors.
5. Market Adjustment to New Policies: The market is adjusting to the broad spectrum of changes introduced in the budget, including modifications in capital gains taxation and treatment of share transfers. These adjustments are creating a period of volatility as investors reassess their portfolios.
6. Short-Term Perspective: The market is currently reacting with a short-term perspective to these policy changes. While some experts advocate for a focus on long-term benefits, the immediate reaction has been negative.

In summary, the combination of revised tax rates, changes in STT, increased taxes on non-resident investments, and the removal of cost indexation has contributed to today’s stock market decline. Investors are in a phase of reassessment and adjustment to the new fiscal landscape.