LTCG Knocks the Wind Out Of Markets

The budget has come and gone and the bullish fervour has taken a severe drubbing. The much talked about LTCG has been brought back. I have in the last few weeks talking about the same and it has happened. The budget is populist in nature and has been presented with the general elections in mind. The spate of state elections scheduled with some NE States followed by Karnataka have something built in for them as well. Markets reacted in the manner they know best and fell on budget day to recover. However, the recovery was short lived as we had a black Friday thereafter.

The BSESENSEX lost 983.69 points or 2.81% to close at 35,066.75 points. NIFTY lost 309.05 points or 2.87% to close at 10,760.60 points. This does not seem to be enough as Dow Jones too had a Black Friday amidst concerns of rising interest rates. It was a bad day and a week as the Dow lost 665 points on Friday and suffered a weekly loss of 1,095 points or 4.29%. The Indian Rupee too came under pressure and lost 51 paisa or 0.80% to close at Rs 64.06.

The markets saw pressure across sectors. Some interesting data point show the extent of damage in the small and midcap segments. The high of BSEMIDCAP was 18,321 points made on the 9th of January and the closing was 16,579 points on Friday evening. The fall was 1,742 points or 10.51%. In the case of BSESMALLCAP the fall was 2,336 points with the high being made at 20,183 points on 15th of January. The percentage fall was 13.09%. The BSESENSEX and NIFTY made a high on 29th January which was the budget week itself and fell 3.93% and 3.82%. The key takeaway from this is the fact that the markets were being setup in a manner to distribute stock in the most vulnerable sector or segment and they peaked out well ahead of the rest of the market. While the benchmark indices were still rising they had already begun their correction. This is probably midway for more pain to follow. While there is opportunity in these stocks, one has to be extra careful as well.

Inflation is under pressure with rising crude oil prices. It would be important to see what RBI does in its next meeting slated for the 6th and 7th of February. While any hopes of rate cu have been dashed sometime ago, we could be in for a nasty surprise if they decide to take a hawkish stance and tighten rates directly and/or indirectly. One should brace oneself for that as well.

The income tax department has clarified that LTCG would apply only from 1st April 2018. This effectively means that one can still book gains under the old regime. This clarification would keep the markets under pressure and there may not be any substantial rally in the immediate short term. Volatility would continue to dominate the market place. Trade cautiously.

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