Why The Sensex Could Keep Falling Till March End?

Business

oi-Sunil Fernandes

By Sunil Fernandes

Updated: Saturday, March 17, 2018, 9:26 [IST]

After a staggering 600 points rally on Monday, it was expected that the benchmark indices would definitely end the day higher. However, between Tuesday and Friday, the Sensex lost the entire gains made on Monday in the next four days.

For the week, the Sensex declined 0.39 percent and the Nifty fell 0.31 percent. Bad news does not seem to end for the BJP. The party lost crucial bye-elections and after having recovered from the shock the TDP pulled the plug. The party withdrew support to the BJP, in what maybe crucial ahead of next year's elections.

The markets ended at the lowest point of the day and as political developments get muckier, expect the markets to turn increasingly volatile. In all probability we might see the markets ending below the 33,000 points next week. Here are a few reasons why we may see selling pressure till the end of March, 2018.

Mutual Funds declaring dividends to beat deadline

From April 1, 2018, the dividend distributed by equity oriented mutual fund would be taxed at at the rate of 10 per cent. Currently, there is no dividend tax on equity mutual funds. Many mutual funds have started declaring hefty dividends to beat the deadline.

Mutual Funds, which have seen hefty inflows are now beginning to sell, probably to also raise cash for paying dividends. In fact, on Friday we saw domestic institutions net sell in the cash market to the tune of more than Rs 770 crores.

Some more selling pressure from these funds until the end of March is possible.

Inflows into mutual funds slowing

Domestic institutions have been lending support to the markets for several months now. However, we are now seeing flows into mutual funds slowing down considerably. According to reports inflows into balanced funds in February fell Rs 5,026 crore when compared to Rs 9,756 crore in December 2017 and Rs 7,614 crore in January.

The dividend distribution tax announced by the government is probably one reason we are seeing a slowdown in fund flows.

Selling from retail investors to beat the Long Term Capital gains Tax

The government has announced a Long Term Capital Gains tax on shares from April 1, 2018. This may lead to some selling pressure from retail investors to beat the deadline. In fact, there we see renewed buying emerging later in the month of April, 2018. Also, there could be some liquidity driven pressures up until the end of March 2018.

Political developments

Political developments are taking a turn for the worse. Political developments, particularly the "no confidence motion" would be eagerly watched, though the BJP is expected to sale through.

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