While the markets rose around 450 points, the rupee rose to its highest level in over four months today after the government, unfazed by the opposition to its steps, made clear its intention to pursue further reforms. The rupee was at 53.60/63 against the dollar from its Thursday close of 54.385/395.
Indian markets ended the week at 52-week highs and were also the best-performing markets globally for the week. Here’s why:
Withholding tax cuts adds fuel to market
1. The government today cut withholding tax on overseas borrowing by local companies to 5 percent from 20 percent. This will give local companies access to cheaper funds. The market was already up as investors perceived the government’s notifying of the last week’s FDI decisions as its resolve to go ahead with reforms despite the political opposition. This, along with the tax measure announced by the mid-session, seems to have brought back investor confidence in the UPA.
“The global liquidity is already positive for the rupee. I see the current measures will lead to a continued rupee rally,” Satyajit Kanjilal, chief executive at Forexserve told Reuters. He expects the rupee to rise to 50.80-51 levels to the dollar in the near term.
Rajiv Gandhi Equity Savings Scheme approval to encourage retail investors
2. The finance ministry also approved the Rajiv Gandhi Equity Savings Scheme to encourage small investors to enter the stock market. Under the scheme, retail investors earning less than Rs 10 lakh ($18,400) annually, would be eligible for a 50% tax deduction on investments up to Rs 50,000. The programme will include mutual funds and exchange-traded funds.
Infra cos to gain from govt’s tax measure
3. Shares of infrastructure companies gained momentum as sentiment turned positive on hopes that infrastructure and construction companies, burdened with huge debt, will benefit from the government’s tax measure.
Airlines rally as govt relaxes minimum requirements for Indian airlines to fly overseas
4. The government also said it would relax the minimum requirements for Indian carriers to fly overseas. The new rules will relax current norms of a minimum requirement of 20 aircraft and five years of experience for airlines, civil aviation minister Ajit Singh said today, following which shares of Indian airlines surged around 6 percent.
Centre may approve FDI in insurance too
5. In addition, media reports indicated the Centre could announce more reform-centric measures in the coming days to counter the lingering impression of policy paralysis. The Prime Minister may also address the nation later on Friday to explain the rationale behind the reform measures. Insurance-related stocks such as Reliance Capital rallied today on hopes the government will next consider increasing the foreign direct investment limit to 49 percent from 26 percent in the insurance sector.
6. The sentiment is also upbeat amid steady FII flows
Market experts see the positive trend in FII flows persisting after the world’s leading central banks announced fresh round of monetary stimulus to push global growth.”Inspite of political issues which the government is facing, it has not diluted the reforms and is still going ahead,” said market analyst Ambareesh Baliga. He added that this being the first major trigger, local investors are bound to participate in the rally.
Also, with the government going on the offensive on reforms, the threat of a debt rating downgrade has receded for the time being. More inflows from FIIs and FDIs will also improve India’s weak external situation while a successful disinvestment programme might help the Government meet its annual fiscal deficit estimate.
“We believe this will provide some impetus to the retail participation in the market by increase in participation from first time retail investors into the market.However,these will now have to be followed-up by some of the core reforms, which will encourage further investments in the manufacturing segment and hence, attract more money,” Dipen Shah, Head of PCG (Private Client Group) Research, Kotak Securities, told Firstpost.
Concerns about the stability of the UPA Government were also largely addressed
7. And finally, political uncertainty ended with the Samajwadi Party chief Mulayam Singh Yadav saying his party would continue giving support to the UPA from outside. The UPA has been reduced to a minority after the Trinamool Congress decided to withdraw its support.
” With troublemaker TMC out of the way, the government seems all the more emboldened to go ahead with pending reforms. Markets could rise further if the bottlenecks to fresh domestic investments are removed. Global markets also need to be supportive. However, one must be careful as inflation remains sticky and the RBI may take a while before slashing rates. The external situation also remains fragile, especially in Europe and China,” said Amar Ambani, Head of Research, IIFL, in a note today.