Indian shares and bonds fell sharply on Thursday, rattled by a tax on exchange transactions proposed by the newly elected government in its otherwise investor-friendly federal budget.
The 30-share Mumbai Stock Exchange Sensitive Index closed 2.26 percent lower at 4,843.84 points, while the key 10-year bond's yield rose a steep 10 basis points to 5.8347 percent.
While analysts broadly welcomed the budget's implications for Asia's third-largest economy, the proposal to tax exchange transactions of both stocks and bonds weighed heavily on markets.
"It is a reasonable budget and, given the political compulsions, the finance minister has done a good job," said Paras Adenwala, head of equity funds at Birla Sunlife Mutual Fund.
"But the optimism over a reduction in short-term capital gains taxes and doing away with long-term capital gains taxes has been diluted by the introduction of a transaction tax," he added.
The tax of 0.15 percent on the value of transactions could erode profits, especially on bonds, as bid-offer spreads are very narrow, dealers said.
In line with the government's objectives to boost tax revenue to pay for additional welfare spending, the budget also included an additional 2.5 percent levy on corporate profits, which hurt investor sentiment.
The Congress-led coalition government, which assumed power in late May, presented an expansionary first budget on Thursday, vowing to maintain strong growth and cut the fiscal deficit while allocating billions of dollars for the poor.
"The budget is full of intent for the economy, and holds a lot of measures which are positive for the country's growth over the longer run," said Dhananjay Sinha, economist with ICICI Bank.
"Not only will we experience more stable growth, but also better distributed growth, with the poor also benefiting."
Key budget measures included raising the ceiling on foreign direct investment in telecommunications to 74 percent from 49 percent, and in insurance to 49 percent from 26 percent.
Shares of Bharti Televentures, India's second-largest mobile phone services provider, rose 2.3 percent, in sharp contrast to the losses on the Bombay index.
Duty cuts on commodities and technology equipment were also welcomed as they could help ease inflationary pressures in the rapidly growing economy.
The budget proposed steps to increase foreign bond investment in the market and to contain its borrowing programme, briefly boosting Indian federal bonds.