While the forthcoming election outcome on June 4 would be important, Jefferies' Christopher Wood in his latest GREED & fear note suggested that a bigger concern for the Indian stock market -- that domestic fund managers are now discussing, is whether changes to capital gains tax are looming.
Wood said such changes could be announced in the full-year Budget, likely in July, post the general elections. He wondered whether tax capital gains tax rates will be raised or whether the period to qualify for long-term gains in equities would be extended, or a combination of both.
At present, the short-term capital gains is levied at 15 per cent and long-term gains at 10 per cent with the holding period defined as one year. "An extension of the period would, in GREED & fear’s view, be better than raising the rates. Another proposal being floated would be to increase capital gains tax for retail investors but not for those investing in mutual funds," Wood said.
Jefferies' Wood explained: The reason that such proposals are apparently under consideration is growing evidence of retail speculation, most particularly in the options market (F&O or derivatives) where India has options for 182 individual stocks.
He noted that notional turnover for stock options jumped to Rs 921 lakh crore in FY24 from Rs 123 lakh crore in FY20. In fact, the turnover hit Rs 169 lakh crore so far in FY25 beginning April 1.
"Such paper speculation is unlikely to be viewed as healthy by Modi, or indeed the BJP. GREED & fear’s probably correct assumption is that the Indian prime minister has a natural suspicion of those making money out of money, most particularly in a zero-sum game like options," he said.
Jefferies said structural flows from retail to the equity market at around $40 billion per annum is dominated by SIPs. SIPs are monthly instalment investment plans offered by mutual funds where a person can invest a fixed amount in a mutual fund scheme periodically at fixed intervals instead of making a lump-sum investment.
"Meanwhile, retail investors’ net purchases of single stocks via the NSE totaled an annualised $24 billion in the first four months of this year. All of the above is why it will be a surprise to GREED & fear if nothing is announced on capital gains tax in the forthcoming Budget," Jefferies said.
As far as the Lok Sabha elections are concerned, Jefferies said if the BJP wins by “only” the number of seats in the last general election held in 2019 that is quite enough to run the government as the past five years have demonstrated.
"In the last general election in 2019 the BJP won 303 seats in the Lok Sabha, up from 282 in 2014. Remember that Modi originally set a target of 370 seats for the BJP and 400+ for the BJP-led alliance (NDA) in the current general election, as discussed here previously," it said.