By Raunak Haldipur
Finance Minister Jaitley announce the Budget on 1st February 2018. This budget was most awaited because it is the last budget before the 2019 general elections and people were expecting a lot from this budget. This time, the budget didn’t have much to offer, but the government did introduce a few things that caught the attention of the people. There were two major things that happened after Mr Jaitley’s budget speech: The stock market, that is, the SENSEX fell by over 800 points in one day and Bitcoins reached their two-month low.
Impact on the stock market
We can more or less connect both of these things to the Budget, though the government claims that the stock market plunge was not because of the Budget. The FM announced a tax on Long-Term Capital Gains (LTCG) at 10% of the gains. Earlier, the government only used to tax short-term capital gains on shares, which means any gains made by a person selling shares within 12 months of purchasing them. With the 2018 budget, the government intends to tax even the shares sold after 12 months of purchasing them. However, only the gains of over ?1 lakh in a year will be taxed. This demoralised and demotivated stock market investors, making many of them rushing to sell chunks (if not all) of their current share portfolio. This, in all probability, caused the Indian stock markets to plunge as much as it did.
However, let us put the stock market ‘crash’ in perspective. With the Sensex now well over 35,000, a 350-point fall is a mere 1%. So 841 points is a mere 2.4%. It is significant, but not earth-shattering. Besides, this is the extent of fall in the 30 selected Sensex scrips. The impact on the whole market could have been less. Several scrips fell less than 1%.
Stock market investors were one interest group that had continually supported the current government. The tax on dividends and the LTCG imposition were clearly seen as measures against the interests of stock market investors. The stock market was a means for people who wanted to invest their money for the long term without any tax implications. The tax on LTCG, especially, looks like a tax on the rich, which by implication should be good for the middle class and the poor. However, all is not over. Creative tax consultants have not yet finished combing the Budget fine print for hidden loopholes, backdoors and traps, especially to escape LTCG on shares.
Fall of Bitcoin
Bitcoin volatility, however, cannot be ascribed to the Budget. The FM in his budget speech said that cryptocurrencies like Bitcoins were not legal tender. This resulted in the Bitcoin reaching its two-month low. The RBI has more than once distanced itself from such virtual currencies.
Bitcoin is traded on many exchanges around the world, and prices in each exchange may vary, but move in the same direction. Besides, Nassim Nicholas Taleb (who predicted the 2008 meltdown) has tweeted that there is no proper way to short the Bitcoin, implying thereby that there is no effective counterbalancing regulatory or commercial force that could stop a runaway bull run, implying in effect that the bull and bear forces on cryptocurrency exchanges are not balanced. Governments all over the world have been worried about the seamier possibilities of virtual currencies used to move ill-gotten wealth around the world, and of such money being almost immune to regulation by any single government or central bank. Therefore, the sentiment of smaller Bitcoin holders has turned bearish in the past month or two, and there has been a good amount of profit-booking. So the fall on Feb 1 could be part of that trend. In India, there may have been a minor impact because of the FM describing them as “not legal tender”
Other aspects leading to volatility of markets
Today, there is a very strong presence of FIIs and FPIs in the portion of shares that ‘float’, that is, change hands frequently, on Indian stock markets, especially in the Sensex scrips. Decision-makers there, are fund managers who, experienced as they are, are often observed to behave like sheep. When one runs out of the barn door, the others also mindlessly rush for the exit. They thus accentuate any inherent volatility. They are also strongly influenced by happenings in far-away markets, so much so that the saying that when US stock markets sneeze, Indian stock markets catch a cold is no longer a joke. Such investors invest money of globally spread-out investors, for whom countries and forms of investment are completely ‘fungible’ or substitutes for each other. Thus, in recent times, we have seen that globally, equity markets are wobbling as a result of a sharp spike in bond yields in most of Europe. Money flows out of equity and into debt in these countries. In this rush, they sell securities held in other parts of the globe so that they can invest it in some other country, perhaps in debt.
One other big factor in Indian stock market is the rise and rise of ‘algo-trading’, where buying and selling orders are placed by computer programs. These are other common suspects at the root of a needless, unexplained volatility.
Featured Image Source: Pixabay
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