Mumbai: Prime Minister Narendra Modi’s remarks over the weekend that people who profit from the stock market should pay more taxes punctured hopes of a post-Christmas relief rally, driving down key indices on Monday.

Traders and fund managers said a slowdown in consumer demand after the withdrawal of high-value bank notes and the expiry of derivative contracts on Thursday contributed to the downbeat investor sentiment.

BSE’s 30-share benchmark Sensex fell 233.6 points, or 0.9%, to close at 25,807.1 points. The broader 50-share Nifty index of the National Stock Exchange (NSE) closed down 77.50 points, or 0.97%, at 7,908.25 points, a seven-month low.

On Saturday, Modi said individuals profiting from stock investments weren’t paying enough taxes and ways should be found to raise levies.

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Some market participants took his remarks as a hint that the government may increase the tax on short-term capital gains, currently at 15%, or impose a levy on long-term capital gains.

Finance minister Arun Jaitley clarified on Sunday that there was no plan to introduce fresh levies on long-term gains, but the market wasn’t reassured.

“The fear of taxation on capital gains on equity has only created a cloud of uncertainty in the already weak sentiment. The upcoming budget on 1 February can only give clarity on this," said Mahesh Patil, co-chief investment officer at Birla Sun Life Asset Management Co. Ltd, who oversees Rs1.69 trillion of investments.

In certain instances, introducing fresh levies on stock market investors will not only allow the government to raise revenue, but will also help in its battle against the black economy.

On 14 November, Mint reported that the government plans to withdraw tax exemption on long-term capital gains made on the sale of penny stocks to end the use of stock markets for tax evasion and money laundering.

Some market participants remained sanguine on the tax front.

“A clarification on the capital gains tax remark by the PM has come, so we do not see it as a major issue. The economic trend has been slightly soft for some time which has weakened the market in the short term. Due to demonetization the sales growth has got affected, which has impacted the earnings," said Sunil Singhania, chief investment officer, equity investments, at Reliance Mutual Fund, which manages assets worth Rs1.83 trillion.

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“Since this is a contract expiry week", traders tend to keep their positions light, he said.

In any case, the near-term outlook for Indian markets has soured because of the double whammy of a stronger US dollar (the result of Donald Trump’s US election win and US Federal Reserve rate hike) and the note ban. Both the Sensex and Nifty have fallen for nine of the past 11 trading days.

This year to date, the Sensex has erased all its gains and is down 1.19%, as foreign institutional investors fled to dollar assets.

On Monday, foreign institutional investors sold Rs1,095 crore of Indian stocks, provisional data from the NSE showed.

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“In the near term, the quarterly numbers will get impacted due to slowing down in consumer demand following the demonetization and its impact on liquidity," said Patil of Birla Sun Life. “The global cues also remain weak with outflows from emerging markets following the sharp rise in US treasury yields with some more upside risk."

Patil expects small-cap and mid-cap stocks to feel the maximum impact.

The S&P BSE Midcap index fell 254.95 points, or 2.17%, on Monday, while the S&P BSE Smallcap index fell by 248.20 points, or 2.1%.

Fund managers also said that while global cues are uniformly poor for all emerging markets, the next set of triggers would be enough currency coming back into the system to lubricate trade and the Union budget, which is likely to push for a fiscal expansion.

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