.Why in news?
- US stocks suffered their worst falls in more than 6 years.
- This was after steep losses on Wall Street that slashed the Dow Jones Industrial Average (DJIA) by 4.6%.
What is DJIA?
- The Dow Jones Industrial Average (DJIA) or simply Dow Jones is a stock market index.
- It is the price-weighted average of 30 significant stocks traded on the New York Stock Exchange and NASDAQ (an American stock exchange).
- The Dow Jones Industrial Average fell 4.6% overnight, recently.
- The developments in Wall Street found ramifications in Dalal Street.
- Wall Street in the New York City is generally associated with the financial markets of the US as a whole.
- Dalal Street in Mumbai houses the Bombay Stock Exchange and several related financial firms and institutions.
What triggered this?
- The US Labour Department reported that employment had risen more than expected in January.
- This was with the biggest wage gain in more than eight-and-a-half years.
- The workers commanding higher salaries fuelled apprehensions of a rise in inflation.
- In turn, there was anticipation that the Federal Reserve may raise interest rates faster.
- The markets were worried that it may push investors to move to US Treasury bonds.
- This is because returns on Treasuries would look relatively more attractive than stocks at this juncture.
- The US 10-year Treasury yield also surged to a level that is the highest since January 2014.
- This was ultimately expected to suck out liquidity from the equity markets.
- All these triggered a fall in stocks, leading to a plunge in Dow Jones by 4.7%, its largest single-day point drop in history.
What are the developments in India?
- Sensex scaled to new peaks almost on a daily basis in India until the presentation of the recent Budget.
- However, the post budget scenario started to take a turn.
- The Budget slapped a 10% long-term capital gains (LTCG) tax on equity gains of over Rs 1 lakh (Click here to know more).
- The budget also projected a higher fiscal deficit.
- Resultantly, investors dumped stocks across the board and the Sensex fell.
- This was also driven by the undermined market sentiment due to:
- rising bond yields in India and across the world
- the possibility of higher inflation
- fear of interest rate hikes (by RBI in India and by US FED as well)
- The fall in stock market was further accelerated by the recent plunge in Wall Street.
What would the impact be?
- The interest rates hikes in the US could lead to outflow of foreign portfolio investor funds from emerging markets.
- This is a concern for India, as funds would move out of the country to be parked in US Treasury bonds.
- The continued inflow of retail money into Indian equities through Mutual Funds could act as a counterbalance to FPI outflows.
- However, the imposition of the LTCG tax may disrupt that inflow of retail money.
- Retail investors are concerned on compliance issues.
- These include keeping track of days of investment and calculation of capital gains for payment of tax.
- Resultantly, new investors coming into India may not reflect the positive trend as in the last 3 years.
- Besides, fund outflows could have ramifications on the current account deficit (CAD).
- This is because India has been balancing CAD through higher inflows.
- The possible outflows and a widening CAD may lead to more complications for government finances.
- Also, hundreds of companies that have lined up Initial Public Offering market will have to rework their plans.
- The disinvestment of public sector companies could also get hit.
- Evidently, in the last year, a number of PSUs had floated IPOs, raising thousands of crores for the government.
Source: Business Line, Indian Express
