(Bloomberg) -- Indian stocks surged with the rupee while bonds slumped after the government unexpectedly slashed the corporate tax rate to boost economic growth.
The Sensex jumped 5.3%, its biggest gain since May 2009, led by banks and automakers. The rupee climbed 0.5% against the dollar. The yield on 10-year bonds surged 15 basis points, the most for the benchmark notes since January.
Tax on domestic companies will be cut to 22% from 30%, Finance Minister Nirmala Sitharaman said Friday. The effective new rate will be 25.2% including all additional levies and is applicable only for companies. The move follows announcements over the past month to boost consumer demand, bolster imports and attract investments into the country.
“The measures aren't a patchwork but are real agents that will help revive growth,” Rajiv Singh, Hyderabad-based chief executive officer at Karvy Stock Broking Ltd. “The fiscal deficit is a concern but at this time, growth should take priority.”
The news comes after stocks came under heavy selling pressure from foreign investors. Overseas funds sold a net $4.9 billion of Indian equities this quarter through Wednesday, poised for the biggest quarterly outflow since at least 1999. The Sensex index entered a correction on Thursday after falling 10% from a high reached on June 3.
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Industry groups had been demanding that the government should use the fiscal space afforded to it last month by a more than $24 billion windfall from the Reserve Bank of India to revive the economy. The government's measures to reverse the slowdown have so far come in tranches and were seen as inadequate.
All but two of the 19 sector sub-indexes compiled by BSE Ltd. gained, led by a gauge of auto stocks. HDFC Bank Ltd. provided the biggest boost to the Sensex.
The S&P BSE Auto Index advanced 10%, its biggest jump in a decade, led by Ashok Leyland Ltd. A measure of banking stocks climbed 8%, the most in six years, boosted by private sector lender HDFC Bank Ltd.
Indian companies that announced share buybacks this year could save about $1 billion in taxes as deals announced before the government introduced a 20% levy on such transactions on July 5 will be exempt, Finance Minister Nirmala Sitharaman said on Friday.
Here's what market participants are saying:
A.K. Prabhakar, head of research at IDBI Capital Market Services:
- “High tax-paying companies like Maruti Suzuki, HDFC Bank are just zooming. I have not seen this kind of rally in recent years, besides an election day. It will arrest the downtrend in sentiment, and auto companies are among the highest tax payers, so this will help some of the sectors that have been worst hit recently.”
Vaibhav Sanghavi, co-chief executive officer at Avendus Capital PBC Markets Alternate Strategies LLP in Mumbai:
- “Investor sentiment will turn positive as the tax cut will help corporate profitability, increase business confidence and thus throws open a prospect of better valuations of firms.”
Mustafa Nadeem, CEO, Epic Research
- “Today's reaction is totally out of surprise and it will be acting as strong support for the coming weeks and months. 10700 - 10800 is now set to be a strong base for Nifty and we may see continuity in positive momentum on any dips from here on.”
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To contact the reporters on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net;Nupur Acharya in Mumbai at nacharya7@bloomberg.net;Ronojoy Mazumdar in Mumbai at rmazumdar7@bloomberg.net
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, ;Lianting Tu at ltu4@bloomberg.net, Anto Antony
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