DIWALI DHAMAKA - EXPECTATION OF ‘BONANZA GIFTS’ RISES!!

What a run the market had today!!!

No one expected that all of a sudden, the despondent moods would do a complete 180 degrees turn and rise almost 670 points. The Sensex was so close to the 40,000-mark; it was a pretty anxious moment to see whether or not it rises over the intraday high of 39,917, just another 83 points and it would have been 40,000. But it beat a retreat from that high point after 2.30 and traded around 520-550 range for some time to ultimately close the day over 600 points.

So did Diwali brighten up the moods today?

Well, it was a collection of reasons, all pointing to the fact that the worst slump could be over; the feeling on the Street is that we could have hit the bottom and now it’s time to bounce back. And giving impetus to this thought are two factors – rumours of major tax cuts in or before the Budget and earnings of some companies coming in much-better-than-expected.

Unconfirmed news from Finance Ministry and NITI Aayog is that Narendra Modi and Finance Minister Nirmala Sitharaman are planning a series of tax alignments for equities in the coming weeks.  The idea is to boost sentiments and bring in more forex into the government’s coffers.

Talks are on that the existing structure of Long Term Capital Gains (LTCG) tax, the Securities Transaction Tax (STT) and Dividend Distribution Tax (DDT) are being reviewed by the PMO in consultation with the Finance Ministry’s Revenue Department and NITI Aayog.

The news is that the Govt wants precious forex to stay in India for longer term and for this, wants to attract money from sovereign wealth funds, pension funds and insurance monies to flow into local equities. To make this good enough, the thought is to align India tax rates with that of the global peers.

DDT is expected to come down pretty sharply as sovereign funds do look at dividend income  and if the rate is high, it acts as a dissuader; so much so that there is news of the Govt considering even abolition of DDT altogether.

DDT is a major bone of contention as currently what companies pay is double taxation. They first pay 15% DDT on the dividend paid, plus 12% surcharge and 3% education cess.  The move to scarp DDT might be on account of the loophole it left gaping open in the Budget for current year wherein effective 5^th July, an additional tax of 20% came into play in case of buyback of shares by listed companies.

Another major grouse has been the rates of Long Term and Short Term capital gains tax.  Post the FY20 budget, 10% long term capital gain tax is payable for shares held over one year and sold at a profit of over Rs.1 lakh. In case the shares are sold within one year, a flat Short Term Capital Gains tax is applicable at the rate of 15%. There is talk of these rates coming down substantially.

The market has also been demanding doing away completely with the STT, which is  charged on buy and sale of securities instruments, including equity. But this might not happen as STT earns big money for the Govt and more importantly, it is an important tracker of the equity buyer. Thus STT might not be abolished but might be reduced.

This is naturally, great news for the market and it celebrated today at the mere thought of this happening.

Also the good numbers from Tata Motors was also a major mood booster. It reduced its loss substantially for Q2FY20 and this was thanks to JLR posting a 13-quarter high margin a revival in Chinese sales. One does not know if the tick up in JLR sales is sustainable for after continuous bad news from the auto sector, this was reason enough to celebrate.

As of now, the moods remains pretty upbeat and this will continue till news on these tax cuts comes from the Govt – if the cuts do happen, it could indeed turn around the moods completely but if not, then we will be back to square one, with economy and falling demand taking center stage.

But yes, this rally is here to stay for some more time…..