Indian markets gained nearly 2 percent on Wednesday after Finance Minister Arun Jaitley’s budget speech. The Nifty closed above 8700 points for the first time since 24th October, 2016, finally settling at 8716 while the Sensex closed at 28141.64, up 485 points from the previous day’s close.
Prime Minister Narendra Modi’s government has been under pressure to cut taxes and raise capital and welfare spending to ease a painful cash crunch caused by the government’s demonetisation scheme launched on November 8. Indian stocks have also been hit by a perfect storm in recent months caused by volatile global markets after Donald Trump’s election win in the U.S. and foreign investors withdrawing from emerging markets.
Following are five reasons why the stocks gained across sectors.
1) No change in capital gains tax regime:
The government has left capital gains tax regime unchanged. Investors had feared a hike in long-term capital gains tax in Wednesday’s budget. Currently stocks held for more than one year are not taxed while those sold under one year are taxed at 15%.
2) Fiscal deficit target on track:
The government said it would achieve a fiscal deficit target of 3.2 percent of GDP in the fiscal year 2017-18 and bring it down to 3% in FY19. The forecast allayed fears of the government wildly overshooting its previous forecast.
3) No hike in service tax:
The government did not hike service tax, as widely anticipated. A hike in service tax would have further squeezed consumer demand already hit by the government’s demonetisation scheme.
4) Budget relief across sectors:
The relief rally also got a leg up from investors buying beaten down stocks. Shares of real estate companies moved higher by up to 7% with the Budget providing several stimulus measures for affordable housing, both in rural and urban areas. Affordable housing have also been provided infrastructure status that will help boost bank funding for such projects and make it easier for real estate companies to access more legitimate forms of funding.
Banking stocks also saw buying with the budget setting aside Rs 10,000 cr for recapitalising PSU banks in FY18.
5) Liberalised FDI regime:
Investors also expect further liberalisation of India’s foreign direct investment policy. The government has proposed that it will do away with the foreign investment promotion board – a board that gives clearances to foreign investments up to Rs 5,000 cr. Finance Minister Arun Jaitley also announced that further liberalisation of the FDI policy is under consideration. This is seen as a significant reform measure as foreign investors have always pointed out FIPB to be a major irritant in bringing in FDI.