A View on the Forex (Foreign Currency) Markets

So, as expected, the market has fallen. It was probably holding on just because of the budget. As expected, the budget (being the last of the UPA - 2 regime), couldn't have been a reformist one. And because of the condition the country is in, it couldn't have been a populist one too. We are in dire need of money. With no reforms, it is sure to have an effect on the equity markets. Not only that, it will also affect the Forex markets and the Commodities markets. This post discusses just that - the effect of the Budget 2013 on the Equities, Commodities and Forex space.

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Budget Highlights

Income Tax

The Finance Minister, Mr. P Chidambaram, made the following changes to the personal income tax structure in his budget speech today:

1. Personal Income Tax Exemption limit hiked to Rs.1.5 lakhs (earlier Rs.1.1 lakhs) for all assessees, Rs.1.8 lakhs for women (earlier Rs.1.45 lakhs) and Rs.2.25 Lakhs for senior citizens (earlier Rs.1.85 lakhs).
2. Income between Rs.1.5 lakhs to 3 lakhs to be taxed at 10%
3. Between 3 lakhs and 5 lakhs to be taxed at 20%
4. Above 5 lakhs to be taxed at 30%

Surcharge ( @ 10%) on an income above Rs.10 lakhs, Education Cess (@ 2%) and Secondary and Higher Education Cess (@ 1%) remain unchanged. An additional deduction of upto Rs.15000/- has been introduced under section 80D for an individual who pays medical insurance premium for his/her parents.

Short Term Capital Gains

Short term capital gains (in case of shares, gains resulting from sale of shares which are sold within 12 months from the date of purchase), which was earlier taxed at 10% will now be taxed at 15%. Long term capital gains remain exempt from tax.

Other Taxes

1. Dividend Distribution Tax, which the market was expecting to be reduced to 12.5%, remains at 15%
2. Surcharge on corporate tax, which the market was expecting to be reduced to 5%, remains at 10%
3. Securities Transaction Tax (STT), which the market was expecting to be increased, remained the same. It will now be treated as a deductible expenditure against business income.
4. STT on options, which was earlier levied on the sum of the strike price and the premium and was borne by the seller, will now be levied only on the premium amount and will be borne by the seller (if it remains unexercised). However, if the option is exercised, the STT will be levied on the settlement price and will be borne by the buyer.
5. Commodities Transaction Tax will be levied on commodity futures on the same lines as STT
6. Banking Cash Transaction Tax (BCTT) will be abolished with effect from 1 April 2009.

Service Tax

Four new services have been added to the tax net. However, the threshold limit of exemption of service tax for small service providers has been increased from Rs.8 lakhs to Rs.10 lakhs. As a result 65000 small service providers go out of the tax net.

Other Major Highlights

1. For marginal farmers (i.e., holding upto 1 hectare) and small farmers (1-2 hectare), there will be a complete waiver of all loans that were overdue on December 31, 2007 and which remained unpaid until February 29, 2008.
2. Government estimates that about three crore small and marginal farmers and about one crore other farmers will benefit from the scheme. The total value of overdue loans being waived is estimated at Rs.50,000 crore and the OTS (One Time Settlement) relief on the overdue loans is estimated at Rs.10,000 crore.
3. Exchange-traded currency and interest rate futures to be launched.
4. Requirement of PAN extended to all transactions in the financial market.
5. Allocation for Defence increased by 10% from Rs.96000 crores to Rs.105600 crores.
6. Peak rate of customs duty left untouched.
7. Duty on steel melting scrap and aluminium scrap reduced from 5% to nil.
8. Customs duty on life saving drugs reduced from 10% to 5% and made totally exempt from excise and countervailing duty.
9. Duty exempted from specified parts of set top boxes and specified raw materials for use in the IT/electronic hardware industry.
10. Excise duty on all goods produced in the Pharmaceutical Sector reduced from 16% to 8%.
11. Excise duty on small cars reduced from 16% to 12% and on hybrid cars from 24% to 14%.
12. Excise duty on two wheelers and three wheelers reduced from 16% to 12%.
13. Excise duty on paper, paper board and articles made therefrom reduced from 12% to 8%.
14. Excise duty on certain varieties of writing, printing and packing paper will be reduced from 12% to 8%.
15. Anti AIDS drug, Atazanavir, totally exempt from excise duty.
16. Refrigeration equipment (consisting of compressor, condenser units, evaporator etc) above 2 TR (tonne refrigeration) utilising power of 50 KW and above exempt from excise duty.
17. Excise duty on packaged software increased from 8% to 12%.
18. Five year tax holiday to encourage hospitals to be set up anywhere in India, especially in tier-2 and tier-3 towns in order to serve the rural hinterland. This window will be open for the period April 1, 2008 to March 31, 2013, during which the hospital must commence operations.
19. A five year holiday from income tax to two, three or four star hotels that are established in specified districts which have UNESCO-declared 'World Heritage Sites'. The hotel should be constructed and start functioning during the period April 1, 2008 to March 31, 2013.
20. Central Sales Tax to be reduced from 3% to 2% with effect from April 1, 2008.

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Budget Day to be Volatile

Shown below is the 60 minutes chart of the Nifty. It wasn’t such a volatile day as we expected it to be. On the contrary, it was a narrow range day with an intra-day movement of only 75 points. More surprisingly, the Nifty is still holding on to our support line mentioned yesterday. Not only that, it even showed a good rally in the last 30 minutes to close near 5300.

A narrow range day suggests that a big move is about to come. This may, or may not, come tomorrow, but will surely come. The more the narrow range days, the bigger the move is likely to be. But for now, we hold our view mentioned earlier that the Nifty is in a short term uptrend (as long as we remain above 5055) and in an intermediate term downtrend (till we remain below 5600) and in a long term uptrend (if 4000 is not broken on the downside). Our view also remains that the Nifty has made a pattern, on its 30 and 60 minutes chart, the target for which is between 5880 and 5900. This will not come in a single rally. There will be minor corrections in between. Traders should continue to follow the short term trend and investors should follow the long term trend, both of which happen to be up now.

Tomorrow is budget day. There may be volatile movements as Mr. Chidambaram continues with his speech. After the speech finishes the markets may go down. This is because the markets have built up expectations before the budget and not all expectations are always met. But, since the markets are already not expecting anything much out of the budget (and a populist budget, as expected, has already been built into the market), there may be some positive surprises in store.

But, we are safe. The traders are already out of the market and are advised to stay away for one more day. A rally above 5300 should be used to build up long positions (in the short term). For long term investors any dip tomorrow, or in the days to come, should be used to buy. Since expectations are already low, there can be nothing worse which can make the markets go down below our intermediate term supports (at 4600).

As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the budget, the markets or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.

Happy investing!!!

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