NEW DELHI: Benchmark stock indices took a beating on Friday morning, mirroring a sharp fall in Asian markets amid concerns over rising bond yields in Asia this week.

There was already some disappointment from the Budget due to reintroduction of long-term capital gains tax.

Fears of fiscal slippage hurt the domestic currency, which dampened mood further.

The benchmark indices fell up to 2%, weighed down by HDFC, HDFC Bank, ICICI Bank, Larsen & Toubro and Kotak Mahindra Bank. Nifty50 traded lower by 173 points, or 1.57 per cent, at 10,843.45.

Asian sell-off: Earlier in the day, Japanese Nikkei fell as much as 1.3 per cent after the Bank of Japan conducted a special bond purchase operation to curb a rise in yields. Shanghai Composite and Hong Kong’s Hang Seng were trading lower. South Korea’s Kospi was down by more than 1 per cent. S&P500’s March futures were trading 0.2 per cent lower at 2,817.75.

LTCG tax: The FM in his Budget speech announced a 10 per cent levy on capital gains of over Rs 1 lakh without the benefit of indexing. The government’s move to bring back long-term capital gains tax on equities and retain securities transaction tax (STT) has raised questions in many quarters.

“Securities Transaction tax (STT) was introduced for its simplicity of collection and assured revenues. With the reintroduction of LTCG and collection of STT, equities are bearing the brunt of both taxes together,” said Nilesh Shetty, Associate Fund Manager-Equity Funds at Quantum AMC.

The return of Long Term Capital Gain Tax (LTCG), which was not entirely unexpected, but may not be seen as a welcome move particularly by the high-value investors. There is a fear that this might vitiate the investment environment in the short term, said Aniruddha Chatterjee, Head- Buy-side business forThomson Reuters, South Asia.

“Grandfathering of capital gains (realised or unrealised) till January 31 is a positive move, but it could lead to confusion/creative accounting regarding how grandfathered gains are accounted for when actual gains are realised,” Morningstar said in a note.

Fiscal slippage: The fiscal deficit target for FY18 was extended to 3.5 per cent of GDP in the Budget, from 3.2 per cent pegged earlier. What hurt the most was a target for 3.3 per cent for FY19 against the 3 per cent projected earlier. Analysts were looking at a figure of 3.2 per cent.

“The fiscal maths looks largely credible, with the government pushing for consolidation at a slower pace, rather than the 3 per cent laid down by the N K Singh Committee,”

Nirmal Bang Institutional Equities said in a note.

A likely hawkish RBI: The government’s move of a higher MSP of kharif or summer crops and a leg-up to rural consumption will be inflationary, narrowing the headroom for the RBI to act, said analysts. The monetary policy review is due on February 7.

“The expenditure mix has also deteriorated with revenue expenditure outpacing capex in FY18 and FY19, which is far from ideal. The Reserve Bank of India (RBI) will undoubtedly be more hawkish at its meeting on 7 February 2018. Our base case is for a rate hike in Q1 FY19, with an inflation-targeting central bank preferring to pre-empt a surge in inflation,” Nirmal Bang Institutional Equities.

Confusion over announcements: The Budget announcements were made with an eye on ambitious growth in taxes while fuel subsidy is kept unchanged even as crude prices are on the rise. Besides, there is confusion over allocations for the flagship National Health Protection Scheme, analysts said. The concerns hit rupee which continued to tumble on Friday morning. The 10-year bond yields too were ruling at a 22-month high.

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