Stock market bulls on Friday roared back into action with the Sensex posting its biggest single-day jump in over 10 years at 1,921 points, after the government announced a surprise cut in corporate tax rates to revive the sagging economy.
Soon after Finance Minister Nirmala Sitharaman slashed the base corporate tax for existing companies to 22 per cent from 30 per cent and for new manufacturing firms incorporated after October 1, 2019 to 15 per cent from 25 per cent, investors, who were increasingly getting worried over the slowdown in the economy, cheered the announcements and came back with a bang with big purchase orders and covered their short positions. The 30-share BSE Sensex soared 2,284.55 points to a peak of 38,378.02 intra-day, before closing 1,921.15 points, or 5.32 per cent, higher at 38,014.62. Similarly, the broader NSE Nifty Index vaulted 569.40 points or 5.32 per cent to end at 11,274.20.
Friday s big rally in the Sensex came after the index lost around 3,800 points from 39,908 after the presentation of the Union Budget on July 5, amid worries over the deepening slowdown in the economy. With Friday s gain, the Sensex has regained half of the losses suffered after the Budget. The Sensex had fallen around 1,300 points this week alone till Thursday, with the drone attacks on Saudi Arabian oil installations pulling down Sensex by over 900 points on Monday and Tuesday.
Hero MotoCorp, Maruti, IndusInd Bank, Bajaj Finance, SBI, M&M, HDFC Bank, HUL and L&T rose up to 12.52 per cent. However, PowerGrid, Infosys, TCS, NTPC and Tech Mahindra lost up to 2.39 per cent.
Investor wealth zoomed by a whopping Rs 6.82 lakh crore in a single day to Rs 1.45 lakh crore, even as sectoral indices like auto, bankex, capital goods, consumer durables, finance, energy, oil and gas, metal and telecom indices rallied by up to 9.85 per cent. Only IT and teck closed in the red, losing up to 1.09 per cent.
The broader BSE midcap and smallcap indices followed the benchmarks, rising up to 6.28 per cent. With investors rushing back to cover short positions and making fresh purchases, cash market equity turnover nearly tripled to nearly Rs 90,000 crore, while derivatives turnover also rose to about Rs 2.4 lakh crore.
Dhiraj Relli, MD-CEO, HDFC Securities, said, The stock markets registered the highest one-day gain in a decade. The government has chosen to give reliefs via corporate taxes. For listed corporates, the reliefs will mean 10 per cent increase in EPS for most high tax paying corporates leading to similar rise in indices. He added, The shortfall in tax revenues will take time to be offset by the higher tax revenues gained on higher consumption/investment by capex. In the meantime, the fiscal situation could see some stress which the credit rating agencies may monitor closely.
This could have an impact on interest rates unless the compensating liquidity from FPIs and FDI is large enough. Withdrawing tax on buyback of shares by companies announced before July 5, 2019 restores confidence in fair dealing by the government. Exempting enhanced surcharge on capital gains derived from transactions subject to STT will also be welcomed by the domestic and foreign investors.
According to Vinod Nair, head of research, Geojit Financial Services, the new corporate tax reforms by the Centre is music to investors ears and will help to revive economic outlook in the coming quarters.
FPIs now have a good reason to come back to India and this progressive step will stimulate consumption and ignite capex cycle. Additionally, companies will get more elbow room to pass on benefits to customers, which in turn will improve earnings visibility, he added.