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The Indian government has taken action to suppress the stock market.

On the 23rd local time, the Indian government submitted the central fiscal budget, which proposed to increase the capital gains tax on equity investment and the derivative transaction tax. Indian Finance Minister Nirmala Sitharaman announced:

A 20% capital gains tax (short-term capital gains tax, STCG) is levied on financial assets held for less than 12 months, up from 15% previously.

A capital gains tax of 12.5% ​​(LTCG) is levied on financial assets held for more than one year, up from 10% previously.

From October 1, the transaction tax on stock options will be increased to 0.1%.futuresThe transaction tax was increased to 0.02%, from 0.0625% and 0.0125% previously.

The Indian government's tough measures this time are also intended to cool down the speculative frenzy among Indian retail investors.

India raises taxes to combat speculative frenzy

Indian stocks have hit several all-time highs so far in 2020, continuing a strong rally that began in the previous calendar year. Currently, the market value of Indian stocks has exceeded $5 trillion.

Analysts believe that this is mainly due to the strong participation of Indian retail investors. The number of Indian retail investor accounts has more than tripled since 2020 to about 160 million. Especially among young people, it has become popular to buy stocks andOptionsIn January alone, notional trading in Indian equity derivatives reached a staggering $6 trillion, larger than the size of India’s economy.

According to Bank of America data, the average daily notional trading volume of India's Nifty 50 index options this year is about $1.64 trillion, which has exceeded the S&P 500's $1.44 trillion.

Seeing that the volume of Indian stock derivatives trading has soared to such a high level, the Indian government is worried that households will use all their savings for speculation. It has continued to warn about the increasing market speculation, and then hopes that raising taxes can cool down the speculative frenzy.

Still, Indian stock markets took news of the tax crackdown in stride, with the NSE Nifty 50 index falling 1.8% on the news before recovering almost all of its losses.

Vikas Khemani, founder of Carnelian Asset Management, said he does not expect the tax changes to have a significant impact on market sentiment and remains confident about investing in India.

To be sure, a series of warnings from the government to curb retail speculation in the weeks leading up to the budget have taken some of the wind out of Indian equity derivatives trading. Notional trading in Indian equity derivatives fell to $3.3 trillion on Monday, down more than 40% from a peak in February, according to data compiled by Bloomberg.

How will the increase in capital gains tax affect the Indian market?

Analysts generally believe thatThe tax increase may have a negative impact in the initial stage, but the negative impact will fade quickly. In the long run, these measures may bring long-term benefits to the Indian capital market., as these measures will promote a more sustainable and balanced investment landscape.

Shlok Srivastav, co-founder of Appreciate, said:To be fair, the market and the business ecosystem would like more reasonable tax rates on long-term and short-term capital gains.

Given the re-emergence of overheating in the derivatives market, a sharp adjustment in the short-term capital gains tax from 15% to 20% is reasonable. The Indian market regulator recently said that the growth in derivatives trading has risen from a micro-level problem to a macro-level problem, which is a big hint that the Indian government is actively addressing excessive speculation in the derivatives market.

At the same time, we applaud the Indian government for revising the long-term capital gains tax.For serious long-term investors, raising the capital gains tax from 10% to 12.5% ​​will have little impact on larger gains.And it will prompt investors to enter the Indian market with reasonable long-term expectations and encourage them to become actual stakeholders in the Indian economic growth story.The increase in long-term capital gains tax will dampen market sentiment for some time, but we also know afterwards that participants in the capital market will accept this adjustment and move on.

Shripal Shah, Chairman and CEO of Kotak Securities also said，The Union Budget sets out a clear vision for India's economic future, prioritizing growth and fiscal responsibility. The tax increase is intended to moderate the current excessive stock market speculation and allow the stock market to grow at a sustainable rate.

we estimate,There will be a small adjustment period as the market adjusts to these new tax rates., but this will ultimately help to form a sustainable investment environment and enable the capital market to develop in a balanced and orderly manner.

Shripal Shah also pointed out that India's fiscal budget for 2024 aims to achieve a balance between investor interests and long-term market stability. The rationalization of the capital gains tax system is expected to bring investors a simpler and more operational investment environment, thereby promoting the participation of more investors.

Aman Soni, director of Prudent Equity, believes that the tax rate adjustment is a direct blow, however, it has not changed investors' interest in the Indian stock market. As more and more retail investors participate, the Indian capital market will continue to expand, and investors should focus on identifying stocks that suit their understanding and risk appetite and continue to invest.

Even after the capital gains tax increase, equities will remain the preferred asset class, all things considered, equities will continue to offer superior returns, and given the removal of indexation benefits in real estate transactions, this suggests that equities in general will become the preferred asset class for investors.