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What has propelled Sensex to 40,000 amid a slowing economy

Sensex and Nifty have risen 1,080 points and 300 points, respectively in last four sessions. Sensex rose 269 points to 40,055, Nifty rose 97 points to 11,883 in trade today. Sensex had crossed the 40K level last on July 5 (Budget Day) when the index hit an intra day high of 40,032. However, it closed at 39,513 that day

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What has propelled Sensex to 40,000 amid a slowing economy
Sensex and Nifty have risen 1,080 points and 300 points in the last four sessions.

Sensex and Nifty extended gains for the second straight session today on prospects of the government reviewing existing structure of Long Term Capital Gains (LTCG) tax, Securities Transaction Tax (STT) and Dividend Distribution Tax (DTT). Sensex and Nifty have risen 1,080 points and 300 points in the last four sessions. However, the indices have seen major gains in the last two sessions amid a report that the government was reviewing tax structures for market transactions.

More tax cuts on cards to boost investor morale, attract foreign investment

Sensex and Nifty clocked gain of 851 and 256 points, respectively, in last two sessions. Sensex rose 269 points to 40,055, Nifty rose 97 points to 11,883 in trade today. Sensex had crossed the 40K level last on July 5 (Budget Day) when the index hit an intra day high of 40,032. However, it closed at 39,513 that day.

As government is taking steps for revival amid slowdown in the economy, investors expect more reforms which is pushing indices up. In its first major step to provide fiscal stimulus to pull the economy out of economic slowdown, the government cut corporate tax rate for domestic firms and new domestic manufacturing companies on September 20. Corporate tax rate was brought down to 22% from 30%. For new manufacturing companies, the existing tax was reduced to 15% from rate 25%.

Also read: Share Market Live: Sensex reclaims 40,000, Nifty above 11,830; Bharti Airtel, L&T, Infosys top gainers

The announcement had fired up the benchmark indices with Sensex closing 1,921 points or 5.32% higher at 38,014 and Nifty gaining 5.32% or 569 points to 11,274.

Now, with reports speculating that government is likely to review taxes imposed on market transactions, the rally is back. Sensex is just 257 points away from all-time high of 40,312 hit on June 4 this year, Nifty is 220 points short of hitting its record high of 12,103.

The rally is led by capital goods, auto and metal stocks. While BSE capital goods index rose clocked 222 points to 18,865, BSE oil and gas clocked gain of 184 points to 15,623 in trade today.

ALSO READ:Corporate tax cut no answer to India's economic ills, says Nobel laureate Esther Duflo

Auto stocks which led the rally yesterday saw their BSE index falling 45 points to 18,889 on profit booking today. SBI (3.14%), ITC (3.06%) and Infosys (2.84%) were the top Sensex gainers today.

Tata Motors (1.27%), Tata Steel (1.14%) and Maruti (1.10%) were the top Sensex losers. Market breadth was positive with 1,268 stocks rising against 851 falling on the BSE. 164 stocks were unchanged.

Here's a look at factors which have contributed to a rally on benchmark indices.

Reviewing structure of LTCG, STT, DDT

Sensex which was looking for a trigger to hit 40,000 since October 18, when it touched 39,298, received a boost from a media report which said that the Prime Minister's Office, in consultation with the finance ministry's revenue department and NITI Aayog, was reviewing the existing structure of long term capital gains (LTCG) tax, the securities transaction tax (STT) and dividend distribution tax (DDT).

"A proposed review of key taxes such as LTCG, STT and DTT before the budget have added further impetus to investor sentiment," said Sandeep Nayak, ED & CEO of Centrum Broking.

According to the report, comparative studies are being done to ensure long-term money from sovereign wealth funds, pension funds and insurance money flows into local equities. The report further added that DDT might be the first to see substantial rationalisation.

Quarterly earnings

The indices also rose after September quarter earnings by benchmark heavyweights like SBI, ICICI Bank, RIL, Tata Motors lifted market sentiments that were tepid amid the ongoing geopolitical tensions.

"A strong momentum is seen in the market as healthy Q2 earnings from big corporate and attractive valuation for mid & small caps are providing a favourable risk-reward to investors", said Vinod Nair, Head of Research, Geojit Financial Services Ltd.

Second quarter results have shown tax credits received by many large companies like Axis Bank, ITC, HDFC Bank and Hero MotoCorp, who have already shifted to the lower corporate tax regime of 22%.

Auto stocks gain

The auto industry, worst hit by the ongoing slowdown, has successfully reversed the 11-month decline in sales during Navratri to Dhanteras period.

"The recently concluded festive season has resulted in a turnaround in sentiment. Auto sector especially, which was quite stressed, has witnessed improved sales driven by a competitive pricing strategy adopted by many players," said Sandeep Nayak, ED & CEO of Centrum Broking.

Leading car makers, Maruti Suzuki and Hyundai saw sales spike 7 per cent and 10 per cent, respectively, compared to the same period last year. New entrants Kia and MG Motors also delivered about 3,000 vehicles in total on Dhanteras.

Mahindra & Mahindra, the third-largest player, said in a regulatory filing that the auto division delivered close to 13,500 vehicles across the country on the same day, which as "substantially higher" year-on-year. "Auto volume numbers which will be a crucial indicator of revival in consumer spending," said Ajit Vice President, Research, Religare Broking Ltd.

Global rally

A rally in global markets yesterday also contributed to gains on the domestic indices. Amid global economy feeling pressure of the trade war, growing hopes for a US-China trade deal have optimised traders' sentiments recently.

US and Chinese officials were "close to finalising" parts of a trade agreement after high-level telephone discussions on Friday, the US Trade Representative's office and China's Commerce Ministry said.  US President Donald Trump said he hopes to sign the deal with China's President Xi Jinping next month at a summit in Chile. The trade war has hit economic growth around the world and kept global benchmark indices range-bound for long time.

Another factor that further cheered traders was the highly anticipated Federal Reserve meeting, which is widely expected to deliver another quarter-point cut to its benchmark interest rate when policymakers conclude a two-day meeting on Wednesday.

Bank of Japan's rate decision would also be closely monitored by market participants. S&P 500 on Monday closed at an all-time high amid better than expected results in the third quarter this year and hopes of resolving tensions between US and China on trade war front.

By Aseem Thapliyal

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