Samvat 2083: From LTCG to geopolitics, here are the key policy triggers for domestic equities

The Indian equity markets have remained sideways for more than two years and are still short of the September 2024 peak. The weakness is all encompassing across benchmark indices and the broader markets.

Even after the recent rally in the domestic equities, the returns are negative in the last two years. Nifty is down 6.5% to 24,582 points from its peak of 26,178 in September 2024. Sensex is down 6.8% to 79,752 points from the peak of 85,571 points in September 2024.

The mid-cap and small-cap space have been resilient, and the Nifty Mid-Cap 150 Index and Nifty Small-Cap 250 Index are close to the September peak. This is largely owing to lower exposure of the mid and small cap space to the FIIs, who have been dumping Indian equities lock stock and barrel.

The markets have been braving the multiple storms in quick succession including geopolitical crisis emanating from Donald Trump’s tariff tantrums, and the U.S. Iran war and the subsequent high energy prices. However, the flight of capital from the Indian equities also brought to the fore the high Long Term Capital Gains tax (LTCG) in India.

LTCG and more, what to expect?

Expectations are rife that the government may announce some relief on the LTCG front, which is currently charged at 12.5% on capital gains over one year. On October 13, Finance Minister Niramala Sitharaman has indicated that the government will consider investor views on LTCG tax during Budget consultations, bringing equity taxation back into focus amid continued outflows from the Indian markets.

Earlier this week, FM Sitharaman acknowledged growing anxiety among equity market participants on LTCG and assured that their concerns will be “considered”. That said, FM pointed out that tax concessions only should not been seen as the principal driver of capital markets.

Meanwhile, market regulator Sebi too recommended scrapping LTCG tax for foreign portfolio investors (FPIs) and exempting mutual fund switches from the levy, according to media reports.

Sebi has proposed exempting FPIs from LTCG tax on Indian equities. It has also recommended that switches between mutual fund schemes should not be treated as taxable sales if units have been held for more than a year, the reports said.

If these moves see the light of the day, they will come as a major reprieve for the equity market. Global accounting and investment advisory firm EisnerAmper Global called for rationalisation of long-term capital gains (LTCG) tax on equities in India, as it is impacting post tax returns for foreign investors. The firm said depreciation in the rupee is also compounding the impact on the global investors.

“The increase in LTCG tax on listed equities from 10% to 12.5% in July 2024 has a direct bearing on post-tax returns,” said Charly Weinstein, CEO, EisnerAmper Global.

Will Trump debacle bring relief?

In yet another major move for the next Samwat, it will also be interesting to watch how  the mid-term elections in the US will affect the economy and the market. Crude oil continues to remain on a downward spiral, and there are expectations the Republican rout in the mid-term elections will have a ramification on the ongoing U.S.-Iran war.

“Lower crude price is good for the trade balance as well as currency, which is why the rupee will show signs of appreciation in the next few days. As long as oil is down the rupee will gain notwithstanding the strength of the dollar in the near term,” said Madan Sabnavis, chief economist, Bank of Baroda

“Bond yields have dipped sharply but this too can be temporary as the reality sets in with the next credit policy coming up in December where it looks likely that there could be 25-50 bps hike in rates,” Sabnavis said.

“Inflation is rising and would be crossing the 6% mark soon. Hence the 10-year yield should revert to the 7.30% plus level assuming crude does not spike up again or crash downwards and remains at around $ 100/barrel,” he added.

What about interest rates, macro factors?

US midterm results may have weakened some of the immediate catalysts pushing Indian interest rates higher, but underlying inflation, fiscal, and global-rate pressures are likely to keep the broader direction of domestic yields upward, according to an Axis Bank report. 

The report said the political outcome in the US could ease some of the faster-moving pressures on Indian rates through potentially lower crude oil prices and reduced demand for funds linked to artificial intelligence (AI). However, slower-moving structural factors—including the convergence of Indian rates with global benchmarks and the Mumbai Interbank Forward Offer Rate (MIFOR), broadening inflation and weakening bank demand conditions—continue to point towards higher rates over time. 

While correction in crude oil will come as a relief, the interest rates may continue to rise on the back of domestic inflationary expectations.