The BSE Sensex plummeted sharply, closing down more than approximately standpoints and 1500 points (more than 1.80%- 2.2%); the Nifty 50 also decreased considerably, and estimated other indices (about points) fell as well, closing at levels of Resolution.
There was a massive wipe-out of wealth on the Dalal Street, and the estimated loss in wealth was approximately ₹9-10 trillion for the session. Heavy losses experienced by investors on the market were primarily attributed to higher costs associated with stock trading.
Key trigger: Heavy trading cost
Lack of demand for trading on behalf of investors due to the recent passage by Parliament to impose STTs was significant; STT for derivatives (Futures and Options) will now be increased, causing the base cost of trade for traders to be increased as well as causing increased trading costs and reducing liquidity in the derivatives market, which will result in traders being forced to hold less liquidity than they would ordinarily hold, creating a drastic situation of liquidity and trading costs for investor(s).
Traders lost confidence in the derivatives market due to the increase STT and caused traders (trading liquidity) to sell their shares in all sectors, resulting in a massive reduction in market cap value.
Broader market reaction
Over the entire market, there was across-the-board decreases in value in all and most major sectors of the economy. The decrease value in small- and mid-cap stock was greater than the decrease value in large-cap stock.
Financial Sector Stocks, Bank Stocks, and public sector support stocks were the most negatively affected. Reduced defensive stocks were the only types of stock that slightly increased in value, and that was due to either related support or random support from investors.
India VIXs increased due to high volatility in the markets and resulted in continued high volatility for the foreseeable future. Reduced liquidity also contributed to increased investor concerns and unpredictability of the performance of the Indian stock market.
Disappointment on policy front:
There were many traders hoping for some tax deductions or new incentives to draw foreigners into their market through the budget, but that has not happened yet.
The lack of sufficient measures to draw in foreign investment has created more selling pressure in the market. Some market observers believe that this is just a short-term event and not a change in the way markets behave over time.
What is Coming Next?
In the short term, there will be much volatility in the markets, as traders will need time to figure out the new rules for dealing with tax consequences on their derivative products.
In the medium term, if the government continues to implement programs to help create economic growth, markets should stabilise over time. Although the immediate reaction is based on sentiment, and not from structural weakness.
The Sensex response to the session this week is primarily due to surprise fiscal policy changes (particularly, the increase to the STT), along with having no new measures being provided to create confidence with investors as a consequence, there has been widespread selling and reduction to investor wealth.
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