LTCG, PNB scam, US-China trade war and MF reclassification are among the events that impacted the market this year.
The re-introduction of long term capital gains tax, mutual fund reclassification, ASM list and PNB scam are among 10 events that shaped the markets in 2018.
As compared to stellar returns of around 27-29 percent on benchmark indices in 2017, they have had a subdued 2018, marred by market-corrective events.
So far in 2018, both Sensex and Nifty have returned 5-7 percent, but deeper cuts have been reported in the mid- and small-caps segments. They have fallen close to 16-18 percent so far.
Here is a gist of the top 10 events and how they shaped the market.
Long term capital gains (LTCG) tax
One of the biggest and most impacting decisions for the market this year was the re-introduction of long term capital gains (LTCG) tax.
Finance Minister Arun Jaitley, in his Budget 2018 speech, re-introduced the tax mechanism, and levied a tax on profit generated from assets such as shares and share-oriented products. Investors had to pay 10% tax on profit exceeding Rs 1 lakh made by selling any asset, including shares, mutual funds and other shares-oriented schemes.
Soon after the announcement in the Budget, the market fell in the following sessions with several analysts terming the measure as an anti-investor move.
Mutual fund reclassification
The year also saw a complete overhaul of categories for mutual funds. As per a mandate, implemented by mutual funds now, a fund house could offer 10 types of equity funds, 16 bond funds and 6 categories of hybrid fund schemes.
This reclassification ensured that fund houses had to rename and rework their schemes and reallocate their investor money as well, which resulted in a short-term turmoil in the equity markets.
PNB Scam
In February, the Street was hit by the news of a big scam surrounding Punjab National Bank amounting to more than USD 2 billion.
The scam was said to be carried out of the bank’s Brady House branch in Breach Candy area of Mumbai. The branch issued letters of undertaking (LoUs) to help companies owned by Nirav Modi and Mehul Choksi get forex credit from Indian banks abroad.
Further, there was no collateral or record of LoU issuance in the bank’s core software as per protocol. On renewal, fresh LoUs were issued to rotate this amount.
RBI Governor's resignation
Reserve Bank of India Governor Urjit Patel in a surprise announcement on December 10 said he has resigned from immediate effect on account of personal reasons.
This was a negative cue for the equity market, which opened in the red the very next day.
The resignation came in the wake of a bitter battle between the government and the Reserve Bank over issues such as liquidity management, the RBI's restrictions on NPA-laden banks and the usage of its reserves.
The friction came to light when RBI deputy governor Viral Acharya in a hard-hitting speech on October 29 warned the government that compromising with central bank’s independence could be “catastrophic”.
However, on November 19, India’s central bank seemed to signal a compromise with the government by agreeing to study a demand for sharing a part of its capital. And then came the resignation.
Patel’s term as RBI governor was to end in September 2019.
On December 11, the government named Shaktikanta Das, member of the 15th Finance Commission and former Economic Affairs Secretary, as the new RBI Governor.
ASM list
Stock exchanges introduced additional surveillance measures (ASM) as a measure to address increased speculations and a sharp fall in prices that followed.
In order to enhance market integrity and safeguard investor interest, the Securities and Exchange Board of India (SEBI) and the exchanges have been introducing various enhanced pre-emptive surveillance measures such as reduction in price band, periodic call auction and transfer of securities to trade-to-trade category from time-to-time.
In a notice, the BSE said, market participants may note that ASM framework should be in conjunction with all other prevailing surveillance measures being imposed by the exchanges.
The securities which are placed under the framework are reviewed on bi-monthly (two months) or periodical basis for the applicability of the ASM.
The shortlisting is based on the following parameters: high low price variation, client concentration, number of price band hits, price variation between closings and P/E ratio.
US-China relations
Apart from its war threat against North Korea, the US also has had a huge trade war with China. Import tariffs to the tune of hundreds of billions of dollars have been imposed by both the nations.
Most recently, China and the United States agreed to halt additional tariffs, with fresh talks aimed at reaching an agreement within 90 days.
However, this deal is under a cloud now, following the arrest of Huawei CFO by Canada. The US has sought her extradition on charges of violating American sanctions on Iran. This has irked China, and investors are worried about the ongoing trade truce as well.
IL&FS issue
2018 saw a huge liquidity issue surrounding Infrastructure Leasing and Financial Services (IL&FS).
The lender piled up huge amount of debt as well as defaults on its short-term commercial papers (CPs). This rocked debt market and had a resultant impact on equity market as well. Throughout September and October, the market witnessed a crash from its high points on the back of NBFC sector liquidity fears.
Further, what fuelled the controversy was ratings downgrade by several agencies. On September 8, ICRA downgraded debt papers of IL&FS by several notches, across maturities. These downgrades and following defaults pushed the government to overhaul the complete board and initiate proceedings under the Serious Frauds Investigations Office (SFIO).
Crude shock & Rupee shock
Both crude and the rupee saw huge movements during the calendar year. Major rise in crude oil prices was seen as US imposed sanctions on Iran. This spooked investors anticipating a supply glut, especially to nations such as India.
The war-like scenario between North Korea and US along with Iran sanctions issue shot oil prices up to USD 86 per barrel.
However, prices took a sharp U-turn after the US granted waivers to countries such as India to import crude from Iran. This suddenly led to over 30 percent fall in prices of crude. It fell to sub-60 dollar mark as well before staging a minor recovery to around USD 61 per barrel.
The rupee, as a result of crude movement and mixed macros, rose to around 74.48 per US dollar during the year. However, the fall has led to appreciation of rupee to around 71-odd levels.
Fed commentary
The US Federal Reserve tightened its stance on interest rate scenario, going for rate hikes during the year. But the market took that further projections mean that stronger US economy nudged the central bank to project three rate hikes in 2019 and two in 2020.
However, recent trade war with China, where import tariffs were imposed by Beijing and Washington, is likely to have weighed on the economy there. There are concerns on growth in US and China pushing the global markets in downtrend.
All eyes are on the Federal Open Markets Committee (FOMC) meeting on December 18-19, 2018. The commentary by US central bank on rates will be watched out for.
Tax collections
This year also marked a completion of one year of rollout of goods and services tax (GST). Collections through this tax mechanism hit Rs 1 lakh crore on a few occasions.
Revenue collection from Goods and Services Tax (GST) declined to Rs 97,637 crore in November from Rs 1 lakh crore a month ago, data released by the finance ministry showed.
The government has set a target of over Rs 12 lakh crore for the financial year 2018-19, which can be achieved if the average monthly mop up is around Rs 1 lakh crore, as compared with Rs 89,885 crore in 2017-18.
Till now (April-November), the government has collected Rs 7.76 lakh crore revenue from GST. Achieving the revenue collection target is crucial as it has a direct bearing on the fiscal deficit, which is a gap between government’s revenue and expenditure.
In the last eight months, tax mop-up has crossed Rs 1 lakh crore twice — in April and October. While revenue in April was higher as businesses generally pay arrears for some of the previous months, mop-up in October was Rs 1 lakh crore due to the onset of the festive season.
(With inputs from agencies)
