On Wednesday, the BSE Sensex gained nearly 250 points in morning trade, overlooking the continued selloff in China, where indices fell as much as 4 per cent in early trade. The Nifty edged past the key 7,850 levels, ignoring the 3 per cent slump in Wall Street yesterday.
Wednesday's rally is being attributed to the government's overnight decision to waive the retrospective imposition of minimum alternative tax (MAT) on foreign funds.
Finance Minister Arun Jaitley said the government had accepted the recommendations of the AP Shah panel set up to examine the contentious tax issue that had shaken investor confidence. The government would not seek MAT from foreign funds on capital gains made in earlier years, Mr Jaitley said.
Tuesday's landmark decision is likely to boost sentiments of foreign investors, who have often complained about the ambiguity of Indian tax laws.
"The decision will help to further the government's position that it discourages tax terrorism and welcomes foreign investment in India," said Rajesh Gandhi, a partner in Deloitte Haskins & Sells LLP.
Market analysts say the clarity on MAT will help stem the exodus of foreign funds from domestic stock markets, which reached a record high in August.
Foreign investors offloaded net shares worth Rs 16,877 crore in Indian shares last month, more than the previous monthly record of Rs 15,347 crore in October 2008. The sale pushed the Nifty down 6.6 per cent in August, its worst monthly performance since November 2011.
"The crescendo of ETF-led redemptions led selling likely behind us. The tail is remaining. Reversal a few weeks away," tweeted fund manager Sandip Sabharwal.
Moses Harding, economist with SREI Infra tweeted, "India market has relief support from RBI dovish monetary policy stance and government measures to retain FII over-weight appetite!"
The clarity on MAT comes at a time when the investor community is gripped with apprehension about a rate hike in the US. Interest rates in the US have not gone up in a decade, benefitting emerging countries like India. The MAT decision will act as a speed-breaker for foreign investors when the US hikes interest rates, analysts say.
However, there's growing consensus that more needs to be done to attract foreign investors to domestic markets. The government has been behind the curve as far as economic reforms are concerned and the latest GDP data indicates that the economic recovery continues to be sluggish, analysts say.
"MAT clarification confirms government worried about markets - should have come earlier- better late than never. Will we hold 7,750? Need to kick-start investment cycle," tweeted market expert Ambareesh Baliga.
(With inputs from Reuters)
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