The extraordinary rise in the stock markets on Friday is evidence of the fact that markets were not expecting any major step by the government to boost the economy, after the disastrous GDP showing in the first quarter. But Finance Minister Nirmala Sitharaman managed to surprise by the strength of tax relief for Corporate India and foreign investors, although some of the slide in the economy could well be placed at her door – especially the ‘Rich Surcharge’ that she had imposed in this year’s budget.
On Friday, more than Rs 7 lakh crore worth of wealth was added as market capitalisation on the Bombay Stock Exchange, welcoming the finance minister’s announcement to reduce effective corporate income tax by almost 10 percentage points from 34.94 to 25.17. New companies would get an even better deal of effective rate of 17.01 per cent. Minimum Alternate Tax was removed for corporates which would not utilize any concession and surcharge on capital tax done away with.
The BSE Sensex reacted by rising to 38,359 an increase of 2,285 points before closing at 38,014.62 an increase of 1,921.15 points or 5.32 per cent. The National Stock Exchange’s Nifty 50 rose by 673 points at one stage to settle at a rise of 569.40 points or 5.32 per cent at 11,274.20. With Bank Nifty index rising 8.31 per cent or 2223 points, the overall rise showed that it had not seen such a movement in the last ten years. Exactly a year ago – on September 21, 2018 – Bank Nifty had shown a decline of 1,500 points in the wake of the DHFL crisis. On Friday, the BSE showed a decline in only 5 shares out of 30 which Nifty had only 6 shares out of 50 showing in the red.
Initially, Dalal Street took it is as just another press conference, in a series of press conferences the finance minister had been doing for the last couple of weeks, making incremental changes in some sectors. But the moment, the word ‘cut’ in corporate tax rate was pronounced, the broader market indices of Nifty and Sensex zoomed into three-digit gains in matter of minutes. There was no stopping, thereafter. While the initial part of rally was led by short covering – those who had bought options hoping for a further decline in market, but soon the bulls moved in. The way volumes moved up in the cash segment, it was clear that a lot of delivery-based buying took place on Friday.
It is not common to see double-digit gains logged by large cap. All the stocks of private sector banks gained sharply, given the fact that such banks pay the highest tax and hardly get any exemption. Banks would, therefore, see more money added to their bottom line in the current fiscal. Those companies which had effective tax liability higher than 25.1 per cent would also be gainers. So, many Nifty companies, which had not seen any increase in their prices in the last three years, are likely to see a growth of more than 20 per cent because of tax cuts. This may take care of valuation concerns which had been bothering the Street for long.
Even after one of the highest gains in the last ten years, Nifty might continue to gain when the markets open on Monday. That’s because foreign investor, especially based out of the United States would get the chance to participate in the rally next week since a bullish bias has not been built into the markets. Investor would do better to use this rally to move out of low-quality stocks, especially from companies which have high debt levels.