Bengaluru -Indian shares declined on Tuesday after the government raised the taxes related to trading derivatives and on capital gains on stock trades, which analysts said could hit the markets in the short term.
The NSE Nifty 50 and S&P BSE Sensex dropped about 0.8% each, as of 12:51 p.m. IST. They dropped as much as 1.6% just after the announcement.
The broader, more domestically-focussed small- and mid-caps fell 2.6% and 1.5%, respectively.
The government raised the tax rate for equity investments held for less than one year to 20% from 15% and for shares held for more than 12 months to 12.5% from 10% in the budget.
It also raised the securities transaction tax on derivatives.
“The increase in capital gains tax and securities transaction tax is a dampener for capital markets,” said Sandeep Nayak, executive director and CEO at Centrum Broking.
While the goal is to raise more revenue, these changes might discourage short-term trading, potentially hurting investor sentiment, two analysts said.
Since their COVID-19 lows in March 2020, the stock indexes have rocketed more than 200% each largely due to an influx of retail traders in the derivatives market. But the surge sparked analysts warning of high unsustainable high valuations.
“There was considerable risk to small- and mid-caps given their stretched valuations. Investors are using the drop after budget as an excuse to book profits,” said G Chokkalingam, managing director of research at Equinomics Research.
On the day, 12 of the 13 major sectors logged losses.
Consumer stocks were the only exception, gaining 2% after the government said it will allocate 1.52 trillion rupees ($18.2 billion) for the agriculture and allied sectors.
Agriculture stocks like Kaveri Seeds, Mangalam Seed and Dhanuka Agritech rose between 4.4% and 10.5%.
Fisheries stocks Avanti Feed and Coastal Corp rose 4.3% and 2.3%, respectively after the government pledged financial support for the sector.
Capital goods stocks like Larsen & Toubro, ABB India, Thermax and Siemens lost between 1.5% and 5% after the government did not increase the amount it planned to spend on infrastructure.
L&T was the top Nifty 50 loser. ($1 = 83.6350 Indian rupees)
(Reporting by Bharath Rajeswaran and Manvi Pant in Bengaluru; Editing by Savio D’Souza and Mrigank Dhaniwala)
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