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Surcharge rollback fails to pay off as FPI outflows from stocks continue

George Mathew
Sentiment remains damp, with Sensex seeing 7.9% fall since July 5.

The government s decision to roll back the super-rich tax on foreign portfolio investors (FPIs) and other measures to revive the economy have failed to boost investor sentiment, as the stock markets continued to witness capital outflows as a slowing economy dampened the enthusiasm of the investor community, with the Sensex falling 7.9 per cent or over 2,900 points since the Budget presentation on July 5.

After pulling out around Rs 30,000 crore in July and August, FPIs have withdrawn Rs 4,200 crore from stock markets in September so far. Though FPIs continued to invest in the debt market, net outflows since July 1 this year have crossed Rs 10,000 crore, according to NSDL data.

On the other hand, the debt market received over Rs 23,000 crore since July, with Rs 3,000 crore coming in September so far, the National Securities Depository Limited (NSDL) data reveals.

On August 23, the central government withdrew the enhanced surcharge levied on the foreign portfolio investment on long and short term capital gains, in the wake of protests from FPIs.

The surcharge of 25 per cent was imposed on those having taxable income between Rs 2 crore and Rs 5 crore, and 39 per cent on those with taxable income over Rs 5 crore in the Budget 2019-20.

While the Finance Minister earlier suggested the FPI trusts to convert into companies where the Budget has not made any change in tax treatment, FPI investors called it a cumbersome process and an impractical solution. The selling spree intensified after July 19 when the FM declined to remove or relax the applicability of the new surcharge on the super rich and FPIs.

India Ratings and Research (Ind-Ra) said it expects headwinds to FPI flows into India to continue over the near-to-medium term, despite the accommodative global monetary policy stance and the Centre s efforts to alleviate uncertainty regarding the higher surcharge. A gamut of factors, such as slower-than-expected demand growth in major economies, geopolitical and trade tensions, and a gradual weakening of the economic growth prospects in India, have contributed to a build-up of risk aversion, which has impeded the demand for emerging market (EM) debt instruments, Ind-Ra said.

The impact of these factors has been exacerbated by the weakening current account surpluses of major economies, including China and Germany, which has impaired their ability to export capital. In fact, countries such as China and Saudi Arabia have actually been borrowing large quantum of funds from the global markets.

The government s plan to borrow from overseas markets has not made much headway after the Budget announcement and the GDP growth declined to 5 per cent for the June quarter, with many sectors like auto, FMCG and cement witnessing a slowdown.

The FPI outflow has also impacted the rupee which fell below the Rs 72-level recently. Recently-announced measures by the Finance Minister have failed to boost investors and FPI flows have not improved since July 2019. Crisil lowered India s GDP growth forecast to 6.3 per cent and says that the slowdown is deeper than suspected, said Abhishek Bansal, chairman, ABans Group of companies.

Explained

Global factors as well as domestic woes at play

Despite the Centre s move to rollback the surcharge on FPIs, outflows have continued on account of a gamut of factors. These include slow demand growth in major economies, weakening current account surpluses in nations like China, as well as geopolitical and trade tensions. To add to these woes, many domestic sectors are facing a slowdown and the GDP growth has fallen to a six-year low.

Deepak Jasani, head retail research, HDFC Securities, said, The withdrawal of surcharge on capital gains tax for FPIs and local investors (along with the recent relaxation in eligibility criteria for FPI registration by Sebi) will remove major irritants, though its positive impact on markets will depend on growth issues being sorted out over the near term.

With the Sensex having lost another 351 points in the bygone week, the benchmark has lost 2,927 points since the Budget presentation to end at 36,981.77, with slowdown in many sectors adding to the bearishness.

As corporate margins are under pressure, there s very little chance of making money in stocks. That s why FPIs have shifted focus to the debt where there s scope to get better returns, said an analyst.

The corporate sector registered an 11.97 per cent fall in net profit in the June quarter, even as the Reserve Bank cut the key policy interest rate by 75 points between February and June this year and the banks went slow in passing on the benefits of rate reduction to their customers. Stock markets are now banking on more measures from the government for a turnaround in their fortunes.