A day after Budget 2018, the domestic market extended sell-off with the Sensex tanking over 700 points, while Nifty dipped below its crucial 10,800 level as investors read into the fine-print of the Budget document. 

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The S&P BSE Sensex tanked as much as 765.77 points to 35140.89, while the broader Nifty50 dipped 237.85 points to 10779.05 in intraday trade. 

Among the major reasons, the re-introduction of LTCG hurt investor sentiment most, while the upcoming Reserve Bank of India (RBI)’s monetary policy due next week, where it is expected to hike rates, also caught attention. 

“LTCG exemption was an attraction for new investors into equity/equity mutual funds and brought funds from other low paying avenues. Rising interest rates domestically and tax on LTCG could result in minor reversal of this trend,” said Dhiraj Relli, MD & CEO at HDFC Securities.  

“Reaction of FPIs and the bond markets locally to the 3.3% fiscal deficit proposed in FY19 will be keenly watched in the background of rising rates abroad,” he added. 

1) LTCG tax 

While the long-term capital gains (LTCG) tax has come with a grandfathering clause, investor sentiment has taken a hit as experts believe it is retrograde step, and malign India’s image worldover making it one of the most-taxed countries.  
They also say foreign investors will flock to countries like Singapore and Dubai, which do not tax long-term capital gains. 

Govt has decided to impose 10 per cent tax on LTCG for equity and equity-oriented investments for amount exceeding capital gains of Rs 1 lakh. The tax will be applicable based on cost prices prevailing on 31st January 2018. 

2) Global cues

Negative cues from the global markets also hurt sentiment. Asian shares stumbled, with Korean and Japanese benchmark indices falling more than 1 per cent.

MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.3 per cent and away from a record high.

Wall Street saw a mixed closing on Thursday with the Dow up 0.1 per cent, the S&P 500 marginally off and Nasdaq down 0.35 per cent.

3) Fiscal slippage

Finance Minister Arun Jaitley extended the fiscal deficit target for FY18 to 3.5 per cent from 3.2 per cent pegged earlier in Budget 2017. He also extended FY19 fisc target to 3.3 per cent, from 3 per cent earlier. Market did not expect this much fiscal slippage. 

“The fiscal policy continued on the path of consolidation, albeit at a slower pace than the previous projected path. Importantly, the fiscal impulse (fiscal push to growth) is turning negative in FY19 from neutral in FY18. The fiscal math is broadly credible, although expectations of GST collections look optimistic (~25-30% growth),” said brokerage Edelweiss Securities in a post-Budget review note. 

4) RBI expected to hike rates 

The measures taken in Budget 2018 may push the inflation higher, nudging the RBI to hike interest rates in its policy meeting scheduled next week on Wednesday. 

Traders and analysts said those moves could add to inflationary pressures at a time when retail inflation was at a 17-month high. That would make the RBI more cautious when it announces the monetary policy review on Wednesday next week, they said.

"The probability of rate hikes in the next fiscal year has gone up materially," told A Prasanna, economist at ICICI Securities Primary Dealership to Reuters.