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Mauritius Fears Spook Markets; Sensex@Sub-17,000

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[The BSE benchmark Sensex tanked 320 points on Friday to close below the crucial 17,000 level for the first time in over 3 months after the government said it is considering a review of the tax treaty with Mauritius that sparked intense selling across sectors. The weakening rupee further attributed to the fall. The government's remarks added to the weak FII sentiment, already dampened by lack of clarity on the issue of General Anti Avoidance Rule (GAAR) and huge depreciation in the rupee. Brokers said the Mauritius issue returned to haunt investors after Minister of State for Finance S S Palanimanickam said in the Lok Sabha that the government is considering a review of tax treaty with Mauritius to raise revenues from these foreign investments. Most FIIs route their investments into Indian stock markets through Mauritius taking advantage of the existing double taxation avoidance treaty. The news comes as the finance ministry gets ready to submit a bill containing controversial provisions on taxation for foreign investors next week, under the so-called GAAR rules. The government has promised critical concessions, but investors have yet to be comforted. The worries over foreign outflows are also being reflected by a rupee that continues to plumb four-month lows, given the deep concerns about India's economic and fiscal challenges. "GAAR is a serious concern for foreign investors. If India changes the terms of tax treaty, then it will discourage investors," said Adrian Mowat, Chief Asian and Emerging Equity Strategist for JP Morgan. "India is the only country in MSCI indices that tax institutional investors capital gains," Mowat said. Dipen Shah, Fundamental Research Head, Kotak Securities, said "the renewed concerns over Mauritius tax treaty spooked market which was already hanging in balance with the GAAR issue, a increasingly weak rupee and negative global cues." In addition, there is nothing much to cheer about in the ongoing results season which otherwise would have supported the markets, said D K Aggarwal, CMD, SMC Investments. The 30-share index opened lower in the morning on weak global cues. Soon across-the-board selling emerged, pulling down the key index to below 17,000 level and it finally ended at 16,831.08, a drop of 320 points or nearly 2 per cent. The index was last seen at this level in the last week of January. The 50-share Nifty ended down 1.96 per cent at 5,086.85 points. Technicals for the Nifty are pointing to more falls ahead, after closing below its March low of 5,136, and below the 200-day moving average for the first time since late January. The index could target 5,081, or the 50 per cent retracement of the December 2011 to February 2012 rally. The next support is seen at 4,951, the 61.8 per cent retracement of those gains. The rupee also came precariously close to 54 levels but recouped day's most of the losses to end at 53.47/48, down six paise against the US currency, after RBI's suspected intervention in forex market. The domestic unit opened sharply lower at 53.65/66 and further plunged to 53.92 amid sluggish equities and fears of more capital outflows after reports that government is reviewing taxation treaty tax-heaven Mauritius. However, suspected strong intervention by the Reserve Bank at day's lower levels forced exporters to cover their short positions. It helped the rupee rebound to a high of 53.4350 before ending at 53.47/48, a fall of six paise. However, RBI's intervention in the forex market could not be verified independently. The bearish undertone of the markets have been pronounced in the last three sessions with Sensex losing close to 500 points due to uninspiring FII fund flows, a weak rupee and insipid January-March quarter earnings. Foreign investors have sold a net of about Rs 630 crore in April. Still, they have been net buyers of Rs 318 crore so far in May, according to provisional data, while they remain net buyers of Rs 43,701 crore in the year-to-date. Auto stocks were hit hard for the week after widespread disappointment over their April sales. Hero MotoCorp fell 4.61 per cent on Friday, marking a two-session drop of 11.5 per cent, while Bajaj Auto shares ended lower by 3.8 per cent. Banks were also routed after Fitch Ratings and Macquarie said this week's RBI directives on Basel III guidelines could lead to a equity dilution of around $30-35 billion over the next five years. HDFC Bank lost 3 per cent, while SBI retreated 4.22 per cent. Shares of Reliance Industries dropped 1.7 per cent, following media reports that the petroleum ministry has struck down its plans to recover $1.2 billion in costs before the energy major starts sharing profits with the government from its gas field off the east coast. However, among gainers, drug maker Cipla added 2.63 per cent after CLSA upgraded the stock to "outperform" from "underperform", because it expects "strong" operating performance from Lexapro, an anxiety and depression drug, and a weaker rupee.