Here's why Sensex clocked its sharpest spike in 11 weeks today

• As foreign investors in Indian share market pull out money thick and fast, the Narendra Modi government is in damage control mode.
• Reports that the surcharge on foreign investors in Indian share market may be withdrawn led to a spike in Indian markets.
• Sensex surged over 638 points to clock its sharpest single-day surge in 11 weeks.

Reports that the surcharge on foreign investors in Indian share market may be withdrawn led to a spike in Indian markets. Sensex surged over 638 points to clock its sharpest single-day surge in 11 weeks. Adding to the cheer was speculation that the government may review the existing tax on long-term capital gains too.

The latest budget for the financial year ending March 2020 imposed an additional tax on the country's super rich and foreign portfolio investors (FPIs) got caught in the crossfire. The subsequent anger and market sell-off has wiped off billions of rupees in share market wealth in just about a month as foreign investors rushed for the exit.

Most foreign portfolio investors in India operate as non-corporate entities such as trusts and associations, which are taxed like individuals and therefore the additional tax would fall on them.

However, now the Prime Minister's office has reportedly stepped in. The Finance Ministry under Nirmala Sitharaman has been asked to quickly review the tax proposal on FPIs and come out with a solution that reduces the impact of new taxation on these institutional investors, according to a report by IANS, a news agency.


On the table is a proposal to exempt all income generated by FPIs till the presentation of the Union Budget on July 5 from the surcharge. To be specific, all profits made between April 1 and July 5 this year may not face the additional tax if the proposal is accepted. This will reduce the impact of the new taxation by almost a third, the IANS report estimated.

Sources said that the ministry may announce the changes this week after the monetary policy review by Reserve Bank of India (RBI) on August 7. On its part, the RBI is expected by experts to reduce the policy rates by 25 basis points to improve liquidity in the market and kickstart the investment cycle by the private sector.

However, if the government misses the opportunity to get the proposal approved before the ongoing Parliament session ends, it will either have to wait for the next session in November or pass an ordinance.

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