Mumbai, Aug 23 (IANS) Indian capital and currency markets are poised for a strong recovery after Finance Minister Nirmala Sitharaman on Friday announced the roll back of the contentious tax surcharge on the Foreign Portfolio Investment (FPIs) announced in the Budget last month.

"The enhanced surcharge levied by Finance Act, 2019, on long and short term capital gains tax is being withdrawn," Sitharaman said in a special media briefing here.

The situation has been restored to the pre-budget level, she added.

Sensex and Nifty might gain over 1 per cent on Monday and chances are that the Sensex may scale past the 38,000 mark in a fortnight, Deepak Jasani of HDFC Securities said.

Jasani, however, added that investors will still be cautious owing to the GDP figures to be announced on August 30. Besides, much also depends on the corporate earnings growth, which is currently poor.

The surcharge, along with concerns over slowdown in economic growth, caused a massive outflow of foreign funds. Withdrawal of over Rs 16,000 crore was witnessed in the month of July, which was one of the worst outflows ever from the Indian capital markets.

Since the Budget, the benchmark index, Sensex had fallen over 3,000 points - after it had touched a life-time high of 40,000 - over weak economic growth forecast and outflow of FPI money, a key driver of Indian capital markets.

"Withdrawal of the surcharge on FPIs is a shot in the arm for the sagging market. One can now expect reversal of the FPI selling. The market is likely to look up from now on," said V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Vijayakumar, however, added that sustained rally in the market will happen only when they have visibility on good earnings growth and reversal of the slowdown underway in the economy. "This requires more reforms. The FM has announced that she will come back with more reforms soon. So, there is hope."

Rajesh H Gandhi, Partner, Deloitte India said: "This is a very positive development which would give a fillip to the capital markets. Tax rates for FPIs will come down by 4 per cent to 7 per cent back to the pre-Budget levels and this removes the anomaly created by the Budget 2019. This also shows that the Government is sensitive to the concerns of industry."

Gandhi added that this announcement also benefits domestic investors like individuals and AIFs because it seems that the relaxation has been announced for all capital gains earned on listed investments.