Nifty fell over 700 points

It was a vertical fall for the indices and for the rupee during the last week. Nifty fell over 700 points and Sensex lost over 2200 points for the week. Markets were hit by the crisis at IL&FS, a weak rupee and the impact of the oil subsidy on downstream oil companies. The last straw came from the RBI status quo. This is expected to put further pressure on the rupee. INR weakened to 73.765/$ while 10-year bond yields softened to 8.03% during the week. On Friday the rupee and the bond yields reacted in opposite directions to the monetary policy. The rupee cracked sharply but bond yields benefited.

October began with a massive sell-off by the foreign investors. FPI sell-off in October stood at $1.3 billion in 4 days; dominated by equity market selling. Against the norm of debt market sell-off dominating FPI selling, the first 4 days of October saw equity selling to the tune of Rs.7094 crore and bond selling of just Rs.2261 crore. The total selling of Rs.9355 crore was the sharpest selling in a span of four days in recent times. The FPI selling was led by a weak rupee, valuation concerns and the RBI unwillingness to hike the repo rates. There has also been aggressive risk-off selling in emerging markets.

The first impact of the IL&FS fiasco could be on the RBI tightening the screws on NBFCs. The RBI is likely to tighten asset-liability norms to address the asset liability mismatch issue in the case of NBFCs, which triggered the IL&FS crisis in the first place. IL&FS borrowed in the short term CP market and deployed funds in long term infrastructure projects. RBI is likely to lay down strict norms for matching of maturities so that another IL&FS can be avoided. Currently, IL&FS is undergoing a rescue operation. There may be stringent restrictions on applying short term borrowings to long term assets.

The carnage in most of the OMCs continues as they were hit by a spate of downgrades by foreign brokers. Oil refining and marketing companies lost nearly 30-35% value in 2 days flat and these sharp cuts came after the government decided to impose a Re.1 subsidy on oil companies to help reduce the price of petrol and diesel for the public. The government will absorb a hit of Rs.1.50 while the states have been asked to cut duties by Rs.5. This was seen as a return to oil subsidy economics which had kept OMC valuations subdued in the past and is seen by markets as anti-reforms.

The government finally clarified on the applicability of concessional 10% LTCG on IPOs, bonuses, rights, splits and ESOPs. When the government had introduced tax on long term capital gains on equities in the Union Budget 2018, there was uncertainty over the status of IPOs, rights and bonuses as there was no STT paid on these. The concessional LTCG tax at 10% was only applicable in case STT was paid. Now the government has clarified the exemption from this rule for IPOs, rights, bonuses and ESOPs. The market worry was that in case of such IPO or rights applications, the LTCG tax will have to be paid at the rate of 20%, which is the rule in case STT was not paid. However, this clarification from the government literally puts the entire doubts over the applicability of LTCG to rest.

In many ways, these states were billed as the semi-final before the general elections of 2019 and the battle began when the Election Commission announced dates for elections in 5 states. While the states of Mizoram, Madhya Pradesh and Chhattisgarh will go to polls in late November, the states of Rajasthan and Telangana will go to assembly polls in early December. The counting for all the five states will be done on December 11th. MP, Chhattisgarh and Rajasthan will see a virtual straight battle between the ruling BJP and the Congress party. It is the last big assembly poll ahead of the general elections.

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