Pain to Persist Till Improvement in Corporate Earnings

Taxation for foreign institutional investors (FIIs) was an issue weighing on the domestic markets for quite some time. Though the government reiterated its intention to levy tax on the FIIs a couple of weeks back, the pain or sentiment is more severe due to there being no clarity on the this front. The applicability of Minimum Alternative Tax (MAT) is not for foreign companies which do not have a place of business or a permanent establishment in India. However, the Income Tax Department stuck to its stance on a 2012 ruling by the Authority for Advanced Rulings (AAR) and reiterated its intention to levy MAT on capital gains by FIIs.

The FIIs were seen continuously selling for the last eight trading sessions, except on April 22 when the FIIs bought Daiichi Sankyo’s stake in Sun Pharmaceuticals. The FIIs sold more than Rs 3,100 crore worth Indian equity during the last couple of weeks excluding April 22nd investment data. As the Indian market is traditionally driven by FII investments, the continuous selling caused almost 5 per cent correction in broader markets during the same period. Not only the front runners witnessed selling pressure but the mid and small-cap companies too suffered from considerable selling pressure and the respective indices on the Bombay Stock Exchange slipped 6.34 and 8.91 per cent during the last fortnight.

On the global front too there was a good amount of volatility across all the markets. Though the Greece debt issue still persists and there were no conclusions drawn on the reforms to be implemented in the euro zone during the finance ministers’ meeting last week, the European markets were showing a good amount of buying interest due to a continuing huge quantitative easing program. Further, the US markets too showed volatile trading sessions and touched some new highs over the corporate earning seasons. However, the earnings season was not uniformly good across the companies, causing much more volatility in the markets. The Chinese markets showed good amount of traction on the news of a surprising 100 basis points rate cut during the last fortnight.

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The domestic market was struggling to move up over downgrades due to weak corporate earnings, uncertainty over the monsoon season, slower pick up in government infrastructure and negative sentiments due to MAT on FIIs. While the FIIs were bearish over the last couple of weeks, the DIIs were consistently accumulating Indian equity during the same period. On every trading session, except one instance during the same period, the DIIs were net buyers and bought Indian equities worth Rs 6,160 crore in the last fortnight.

The DIIs are bullish on the Indian economy for such reasons as lower inflation pattern for the last few months, RBI’s initiative for a big rate cut cycle, expected improvement over the government’s proactive reforms, and global liquidity due to quantitative easing in major economies. Meanwhile, the World Bank estimates India’s GDP growth at 7.5 per cent in FY16 and 7.9 per cent in FY17 aided by a supportive external environment. However, we expect the pain to still persist in the short term till there is improvement in corporate earnings over the next few quarters.