Nervous opening awaits markets

BUDGET 2008-09: IMPACT

Negative signals from the US market, where the S&P 500 fell by 2.7 per cent on Friday "� its biggest drop since February 5 "� and the Union Budget proposals will weigh heavily on the Indian market on Monday.

The Budget has proposed to hike short-term capital gains tax by 5 per cent to 15 per cent and made changes in computing the securities transaction tax (STT), leading to a higher tax outflow.

Analysts also expect early elections, latest by September-November, given the populist slant in the Budget, forcing nervous investors to sell stocks and stay in cash.

The market may also discount the move to bring more cash in the hands of consumers by increasing the income tax exemption limit by Rs 50,000 and similar other steps such as lower tax burden on options trading as global cues outweigh positives in the budget.

Amitabh Chakraborty, president, Religare Securities, said: "Global cues will determine the fate of the market. Although the Budget was pro-consumer, pro-consumption, it is unlikely to have any major impact on the markets."

US markets fell on Friday after a report showed business activity falling to the lowest level since 2001 and UBS stating that its losses in credit markets may top $600 billion. The fear that the US credit losses were spreading to other segments after the world's largest insurer American International Group (AIG) posted its widest quarterly losses will also have an impact on local stock prices.

"Indian markets will mirror global cues," said Chakraborty.

Retail investors, who are sitting on profits, may be tempted to sell before this financial year ends (March 31, 2008), following the capital gains tax hike and this will also reflect in the movement of benchmark stock indices, according to an official at Dawnay Day, a financial services firm.

The Sensex immediately tanked more than 300 points after the Budget proposals on Friday, but the index closed the day with a loss of 245 points (17,578 points).

The National Stock Exchange's S&P CNX Nifty fell 61 points to 5,223.50.

The proposals were announced to ensure that investors stayed invested in the market for the longer term. However, analysts say that it would affect liquidity in the near term.

"Some people may look at profit-booking ahead of the new financial year (beginning April 1, 2008), resulting in more short-term volatility. But, in general, markets will remain range-bound until global uncertainties clear. But from a long-term perspective, it is good for markets as the finance minister has left long-term capital gains untouched," said Vijai Mantri, CEO, Deutsche Mutual Fund.

Mantri said mutual funds would now see lesser redemption, resulting in more liquidity into individual schemes and thus better results from a portfolio. "Basically, the frequent churning of portfolio will stop," he added.

Banking, auto and agricultural stocks could see an uptrend when markets open on Monday as P Chidambaram has cut excise duty on cars. Domestic institutions will continue to participate in the market as many new fund offers have collected huge amount of money along with the fourth quarter insurance premium collections.