Year in Review: Major factors that affected markets in CY 2019

Equity markets appeared quite nonchalant to the steady deterioration in the macro indicators in calendar year 2019 (CY19). While the indices moved up to record highs, gains were limited to a handful of index stocks. The benchmark S&P BSE Sensex gained an impressive 13.7 per cent during the period, while NSE's Nifty added 11.2 per cent. The broader market, however, continued to reel under pressure with the S&P BSE Midcap and S&P BSE SmallCap indices sliding 4 per cent and 9 per cent, respectively.

As the year draws to a close, here's a look at major events that affected markets during the year:

Indo-Pak tension: Investor sentiment took a major hit when a suicide attack carried out by terrorist group Jaish-e-Mohammed (JeM) resulted in deaths of over 40 Central Reserve Police Force (CRPF) personnel in Pulwama district of Jammu and Kashmir on February 14. In response to this, Indian Air Force, within a week, launched airstrike on terror camps and launch pads across the Line of Control (LoC) in Kashmir. Markets took a serious hit and the rupee, too, tumbled post the development.

General Election outcome: The landslide victory of the National Democratic Alliance (NDA) government led by Narendra Modi lifted indices to a new high on May 24. Both equity benchmarks – S&P BSE Sensex and NSE's Nifty – scaled new milestones of 40,000 and 12,000 levels that day. The outcome was better-than-expected and improved upon the exit polls’ numbers as the BJP alone won 303 seats, while the NDA won a total of 353 seats out of 543 seats. Most experts had welcomed the election verdict as the mandate was clear and was even better than what the NDA got in 2014.

Budget proposals: Finance Minister Nirmala Sitharaman took market participants by surprise when she, in her first Budget speech on July 5, announced a steep hike in taxes for high-income earners and introduced 20 per cent tax on share buybacks by listed companies. The government had proposed to increase the surcharge levied on top of the applicable income tax rate from 15 per cent to 25 per cent for those with taxable incomes between Rs 2 crore and Rs 5 crore, and to 37 per cent for those earning over Rs 5 crore, taking the effective tax rate for them to 39 per cent and 42.74 per cent, respectively.

After drawing flak and facing pressure from overseas investors, the government finally rolled back the enhanced surcharge in August to boost sagging economic growth. Rules were also tweaked later with companies that had announced buybacks before July 5 were exempted. 

Slowing growth: Economic growth in India, as measured by the gross domestic product (GDP), collapsed to an over six-year low of 4.5 per cent in the second quarter of financial year 2019–20 (FY20). Factory output took a serious hit as the industrial production shrank by 3.8 per cent in October, mainly due to poor performance by power, mining and manufacturing sectors.

Inflation numbers, too, breached the RBI's medium-term target of 4 per cent towards the end of year. In October, retail inflation shot up to a 16-month high of 4.62 per cent and in November the numbers jumped to 5.54 per cent. Wholesale inflation in October crashed to a 40-month low of 0.16 per cent, down from 0.3 per cent rise in September.

RBI rate cuts: In order to pump prime the economy, the Reserve Bank of India (RBI) went on to a rate-cutting spree during the year. The central bank has slashed the repo rate by a total of 135 bps this year before hitting a pause button in its latest monetary policy meet in December. At present, the repo rate stands at nine year-low of 5.15 per cent.    

Stimulus measures / policy boost: The government slashed Corporation Tax to 25.17 per cent, inclusive of all cess and surcharges, for domestic companies on September 20. In effect, the corporate tax rate was revised to 22 per cent for domestic companies, if they do not avail any incentive or concession. Reacting to the news, equities clocked their best day in 10 years. The Sensex rallied 1,922 points, or 5.3 per cent, to end at 38,015, while the Nifty surged 569 points, or 5.3 per cent, to close at 11,274.2.

That apart, the government announced a slew of policy reforms, which included strategic sales of select public sector enterprises (PSEs), merger of select public sector banks (PSBs), and an alternative investment fund of Rs 25,000 crore for the realty sector among others.

US-China trade talks: At the global level, flip-flop by the United States (US) on trade related issues, especially with China, kept market participants on tenterhooks throughout the year. In November, market scaled fresh peaks one after another on the optimism around trade talks between the two largest economies. In the latest development, both the countries have agreed on the terms of a “phase one” trade deal that reduces some US tariffs on Chinese goods while boosting Chinese purchases of American farm, energy and manufactured goods.