Global Stocks Fall - From Wall Street to Dalal Street 

.Why in news?

• US stocks suffered their worst falls in more than 6 years.
• This was after steep losses on Wall Street that slashed the Dow Jones Industrial Average (DJIA) by 4.6%.

What is DJIA?

• The Dow Jones Industrial Average (DJIA) or simply Dow Jones is a stock market index.
• It is the price-weighted average of 30 significant stocks traded on the New York Stock Exchange and NASDAQ (an American stock exchange).
• The Dow Jones Industrial Average fell 4.6% overnight, recently.
• The developments in Wall Street found ramifications in Dalal Street.
• Wall Street in the New York City is generally associated with the financial markets of the US as a whole.
• Dalal Street in Mumbai houses the Bombay Stock Exchange and several related financial firms and institutions.

What triggered this?

• The US Labour Department reported that employment had risen more than expected in January.
• This was with the biggest wage gain in more than eight-and-a-half years.
• The workers commanding higher salaries fuelled apprehensions of a rise in inflation.
• In turn, there was anticipation that the Federal Reserve may raise interest rates faster.
• The markets were worried that it may push investors to move to US Treasury bonds.
• This is because returns on Treasuries would look relatively more attractive than stocks at this juncture.
• The US 10-year Treasury yield also surged to a level that is the highest since January 2014.
• This was ultimately expected to suck out liquidity from the equity markets.
• All these triggered a fall in stocks, leading to a plunge in Dow Jones by 4.7%, its largest single-day point drop in history.

What are the developments in India?

• Sensex scaled to new peaks almost on a daily basis in India until the presentation of the recent Budget.
• However, the post budget scenario started to take a turn.
• The Budget slapped a 10% long-term capital gains (LTCG) tax on equity gains of over Rs 1 lakh (Click here to know more).
• The budget also projected a higher fiscal deficit.
• Resultantly, investors dumped stocks across the board and the Sensex fell.
• This was also driven by the undermined market sentiment due to:

1. rising bond yields in India and across the world
2. the possibility of higher inflation
3. fear of interest rate hikes (by RBI in India and by US FED as well)

• The fall in stock market was further accelerated by the recent plunge in Wall Street.

What would the impact be?

• The interest rates hikes in the US could lead to outflow of foreign portfolio investor funds from emerging markets.
• This is a concern for India, as funds would move out of the country to be parked in US Treasury bonds.
• The continued inflow of retail money into Indian equities through Mutual Funds could act as a counterbalance to FPI outflows.
• However, the imposition of the LTCG tax may disrupt that inflow of retail money.
• Retail investors are concerned on compliance issues.
• These include keeping track of days of investment and calculation of capital gains for payment of tax.
• Resultantly, new investors coming into India may not reflect the positive trend as in the last 3 years.
• Besides, fund outflows could have ramifications on the current account deficit (CAD).
• This is because India has been balancing CAD through higher inflows.
• The possible outflows and a widening CAD may lead to more complications for government finances.
• Also, hundreds of companies that have lined up Initial Public Offering market will have to rework their plans.
• The disinvestment of public sector companies could also get hit.
• Evidently, in the last year, a number of PSUs had floated IPOs, raising thousands of crores for the government.

Source: Business Line, Indian Express