India country-specific ETFs plunged on Friday, with the BSE benchmark index experiencing its worst single day sell-off since August 2015, after the government revealed its annual budget and ended a longstanding tax exemption for equity investments.
Small-cap Indian stock ETFs were among the worst off Friday, with Market Vectors India Small-Cap Index ETF (NYSEArca: SCIF) down 6.3%, EGShares India Small Cap ETF (NYSEArca: SCIN) down 6.9% and iShares MSCI India Small-Cap ETF (NYSEArca: SMIN) down 5.0%.
Meanwhile, the WisdomTree India Earnings ETF (NYSE: EPI) and the iShares India 50 ETF (NASDAQ:INDY), two of the largest exchange traded funds dedicated to Indian stocks, fell 3.2% and 2.7%, respectively, while the S&P BSE Sensex Index plunged 840 points or 2.3%.
Triggering a mass sell-off in Indian equities, finance minister Arun Jaitley delivered his fourth annual budget and announced the end of a tax exemption on equity investments from long-term capital gains taxes, the Financial Times reports.
Starting in April, investors redeeming shares after holding their investments for more than a year will have to pay a 10% levy on all capital gains exceeding Rs100,000, or $1,560. Selling long-term stock investments have been tax free since 2004.
The sell-off on Friday was particularly worrisome as some observers feared India’s long bull run that has pushed up valuations toward a potential bubble territory could experience a sharp correction if any problems unbalanced the status quo.
“It looks like we’re creating a fairly aggressive tax regime for equity investors,” Saurabh Mukherjea, chief executive of Ambit Capital, told the Financial Times. “It feels like a classic case of throttling the goose that lays the golden eggs.”
Nevertheless, bullish traders argued that share prices are still underpinned by an ongoing structural shift in Indian savings toward financial assets, which should help support any market oscillations.
The strong uptrend in India’s equities market has been supported by a growing long-term shift in individual investment behavior as Indian households increasingly shift from their traditional real estate investments and look toward financial assets.
“Equities will still be attractive — 10 per cent is not that big a tax,” Sampath Reddy, chief investment officer at Bajaj Allianz Life Insurance, told FT. “The structural shift from real assets to financial assets will not be punctured by this.”
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