Why Is The Market Falling Today? Sensex and Nifty Drop Explained – Forbes

The Union Budget 2024 announcements on July 23, 2024, stumped Indian investors with an unexpected hike in capital gains taxes. The BSE Sensex slipped nearly 1000 points, and the Nifty 50 dropped more than 300 points in intra-day trade before closing marginally in the green.

The Nifty 50 closed at 24,479.05, down by 30.20 points or 0.12%, while the BSE Sensex ended at 80,429.04, 0.091% lower. Here’s a breakdown of what led to the fall in the Indian stock market.

Key Reasons for the Fall in the Indian Stock Market

The budget’s emphasis on fiscal consolidation and deficit reduction may have raised apprehensions about the potential slowdown in economic growth and the availability of liquidity in the market.

Tax Changes: Recent government announcements to enhance revenue generation have introduced hikes in the long-term and short-term capital gains taxes. The long-term capital gains tax has been raised to 12.5% from 10%, and the short-term capital gains tax on certain assets has been increased to 20% from 15%. These changes have prompted investors to book profits, adding selling pressure to the market.

Extended Rally and Profit-Taking: The market’s prolonged bullish phase resulted in stocks reaching peak levels, creating a ripe environment for correction. Investors began to profit by selling their holdings at these high levels, leading to a broad-based decline across sectors. As prices reached new highs, market participants reassessed valuations, leading to a more cautious approach and subsequent selling.

Overpriced Shares: Many stocks in the Indian market have been trading at elevated valuations, which are becoming increasingly difficult to justify based on their fundamental performance. High price-to-earnings (P/E) ratios and other valuation metrics indicate that multiple stocks are overpriced. Wary of these unsustainable valuations, investors began selling off shares to lock in gains, contributing to the broader market decline.

Options Market Influence: The options market also played a crucial role in the recent market movement. A high concentration of call options at various strike prices created an environment where market makers needed to hedge their positions by selling the underlying stocks. This dynamic added downward pressure on the market as option expiry dates approached, exacerbating the decline.

Stocks that Witnessed Significant Fall

Several prominent stocks experienced significant losses, contributing to the overall market decline:

• Hindalco: -3.50%
• Larsen & Toubro: -3.16%
• ONGC: -2.62%
• Shriram Finance: -1.97%
• Power Grid Corp: -1.68%
• Bajaj Finance: -1.54%
• SBI Life Insurance: -1.37%
• Coal India: -1.11%
• SBI: -1.05%

These declines reflect the broader negative sentiment and market downturn.

What Lies Ahead for Investors?

The recent budget announcements have garnered varied reactions from experts across different sectors who believe the Budget will primarily benefit investors-at-large while creating a level playing field across asset classes.

According to T Manish, SAMCO Securities’ research analyst, the revised tax rates under the new tax regime and the increased standard deduction from INR 50,000 to INR 75,000 will lead to significant savings of around INR 17,500 for individuals. This move is expected to benefit companies in the fast-moving consumer goods (FMCG) stocks like HUL, ITC, Dabur, and Nestle, with suppliers such as Polyplex and Uflex being second-order beneficiaries. 

“Additionally, the increased savings are likely to boost inflows into wealth management firms through systematic investment plans (SIPs) and to stock broking companies via brokerage,” says Manish.

Vaibhav Porwal, co-founder of wealth management company Dezerv, believes the changes to the capital gains taxation will ultimately foster a more stable and mature investment environment. “The widening gap between STCG and LTCG rates incentivizes longer-term holdings and aligns to create sustainable wealth. It will also standardize taxation across various asset classes, simplifying investment decisions and promoting patient capital despite short-term market concerns, particularly with Securities Transaction Tax (STT) adjustments in derivatives,” says Porwal.

Vaibhav Gupta, partner at Dhruva Advisors, pointed out that the reduction in long-term…