A lot of retail portfolios of about 5 lakh value in investments are going to see yearly churn to avail LTCG benefit of 1 lakh, assuming an average return of 20% on the 5 lakh in a year. This money would again be probably reinvested on the same day/week/month. If its invested in the same stocks, I assume they should allow for the scrips to be delivered from their demat accounts before they buy it back - So perhaps buying back on the same day is not an option, I am not sure. This is from a micro-economic perspective.
From a macro-economic perspective, the P/E that a potential new investor will pay would have come down now considering the new tax implication. After all equity is not like tobacco that can command demand at any amount of margins and sin-tax at will. This should re-rate pretty much all stocks. What we saw today is one such.
Next two months will be tricky as the upside is capped at Jan 31st highs for pretty much all stocks. When upsides are capped, people are in general unwilling to buy. This is why some people exit stocks stuck in yearly circuits even if they are splendid businesses. The reason why I think upsides are capped is because of the sell and buyback incentive caused by the LTCG which applies differently until 31st of March.
Buying closer to 31st March would mean that LTCG will apply closer to 31st March in the next year which restricts the number of days available to sell at good price. The more days you have to choose when to sell and buyback, the better. I presume all these calculations have gone into what happened today. This money is bound to come back sooner than later and more people will follow this strategy which could cause volatility like today next week as well but overall we could just be going sideways with the top at 31st Jan and bottom probably at today’s lows or whatever fresh lows are made next week.
It is quite a curious situation and observing it from a micro and macro perspective is going to be very interesting.