Stock market: FPIs ‘absent’ on Budget day; analysts flag near-term risk to flows

Concerns over higher Securities Transaction Tax (STT) on futures and options triggered the sharpest Budget-day selloff in six years. With foreign portfolio investors set to return to the market on Monday, investors are watching for further action after Rs 35,962 crore of foreign outflows in January.

Data showed that FPIs bought Rs 558.13 crore and sold Rs 1,169.82 crore worth of equities in the cash market on Budget day. This was in contrast to domestic institutional investors, who bought equities worth Rs 14,390.79 crore and sold Rs 15,073.52 crore on Budget day.

Goldman Sachs said the softer fiscal drag in the Budget, along with steady capex spending was largely in-line with its expectations, and supports its fundamentally constructive view on Indian equities, driven by earnings growth recovery to mid-teens. 

"We do however anticipate near-term risk on valuations given already weak foreign sentiment further catalyzed by the unexpected timing of securities transaction tax (STT) hikes," it said.

Elara Securities said while higher STT on F&O can reduce speculative churn and attract higher long-term investments, the Budget is unlikely to calm the FPI exodus, as FPIs look for signs of earnings recovery and a respite in rupee weakness before investing. 

It noted that the MSCI India is trading at 21.3 times on one-year blended forward multiples. This is at a 60 per cent premium over MSCI EM, against a one-year peak premium of 65 per cent.

UBS said there was some anticipation of easier capital gains taxation heading into the Budget, but that did not come through. 

"On the other hand, sharp rise in securities transaction taxes on derivative transactions is a negative (for markets in general and particularly for broking stocks). Moving buybacks to capital gains taxation should be a small nudge towards this route for shareholder returns (as against dividends). The above mentioned drag from elevated bond yields should cap multiples in general, and a minor headwind for SOE banks," it said.

UBS believes the market should return to focussing on fundamentals and valuations. It retained its 'underweight' on India in the merging market (EM) universe, with higher valuations commanded in return for earnings growth not very different from the rest of EM.

Amar K Ambani, Executive Director at YES Securities said  at a time when foreign investors have been net sellers and the rupee has been under pressure, the absence of any direct measures addressing capital flows or currency stability in the Budget weighed on sentiment. 

Ambani said the markets will remain sensitive to continued FPI outflows, further possible rupee depreciation, and their combined impact on equities, particularly against the backdrop of global trade uncertainty, recent softness in global commodity prices, and a balance of payments position that is not particularly strong.