Capital markets generally attract foreign portfolio investors (FPIs) when they perform well breaching new levels. The NSE Nifty and BSE Sensex touched their record levels of 12,000 and 40,000 points respectively when the post-poll survey was out in May third week.
Naturally, the FPIs were excited and pumped massive money into the Indian capital market. Also, the FPIs expected the Modi-led government to reduce the tax outgo on the super-rich and other favourable amendments in the Union Budget 2019-20.
The government, which the investors wanted has returned with a much stronger mandate, the rupee is stable, and the oil price has not seen much of a fluctuation in recent times, but any of these has not helped the Indian markets in any way.
The Union Budget 2019-20 was presented on July 5, 2019. The surcharge on the super-rich was increased, and the much-expected rollback or slash in the tax rate on the long-term capital gains (LTCG) was not done. This hurt the market sentiment considerably, and the markets fell.
Furthermore, the Indian corporate earnings have not improved in the decade, reflecting on the poor profitability. On the other hand, the American corporates have fared better, generating much higher revenues than the Indian counterparts.
The liquidity crunch has been prevalent for a much longer time than expected. The Indian economy is still not able to come out of the effects that demonetisation caused in late 2016. The NBFCs are the worst hit, and their ability to lend has shrunk considerably, resulting in lower credit consumption among the mid-caps and small-cap industries.
The mid-caps have not performed well, resulting in the investors turning their focus on the large-caps as the later is considered a far safer bet. Mutual funds have invested heavily in the top ten Nifty 50 stocks, this was last seen in 2008, during the sub-prime mortgage crisis.
The Union Budget 2019-20 increased the tax on FPIs registered as trusts and associations. This move has made investors perceive the newly elected government to be more aligned towards the left, resulting in FPIs pulling out of the Indian capital market.
The FPIs infused as much as Rs 10,384.54 crore in June while they have pulled out around Rs 3,800 crore in July. The selling trend of FPIs is expected to intensify if the government turns a blind eye on the concerns raised by the investors.