Smart Budget Feb 2022: Market responds with a 2.5% surge over two sessions

The market responded positively to the Budget with a surge of 2.5 per cent in values over two sessions in the broad-based Nifty 500. The Nifty 50 also rose by 2.5 per cent. Technically, the Nifty has gone through a correction since late October, when it hit a record high of 18,604. It hit a recent low of 16,410 on Dec 20, 2021, for a retraction of 11.7 per cent from that peak.

But the index has not dipped below its own 200-day moving average, which is considered a sign of good health. A trend following analyst would now hope for a move till a breakout above 18,600 to new highs to confirm that the big bull market is still alive.

There will be a fair amount of resistance on the way up, because traders who were caught with long positions during the downturn would be inclined to sell on the way up. Volumes have remained strong indicating that there is a fair amount of ammunition for the rally, however.

In terms of attitude, it’s clear that this rally has a strong component of retail sentiment. The FPIs (foreign portfolio investors) have sold over Rs 67,000 crore worth of equities since September, when the US Fed started making hawkish statements about inflation. They were net sellers during the Budget session as well.

Domestic investors, including mutual funds (which are heavily dependent on retail subscriptions) have bought Rs 94,000 crore of stocks since September. Since the market has gone up on decent volumes, we must assume the retail investor has also made a significant contribution in direct equity (apart from mutual fund subscriptions) to fuel the rally.

The rupee has held up against the Euro and the Yen but it has lost 1.9 per cent versus the US dollar in the financial year, despite the heavy FPI selling and a rising trade deficit. The dollar has gained across world currencies. The Fed is due to raise policy rates and it has already tapered its bond-buying. 

Although exports have grown at a healthy clip, imports have grown even faster, with energy prices rising on fears of supply disruption due to the Ukraine-Russia tensions. The RBI would be wary about the rupee coming under pressure. 

Domestic inflation, which is being driven up by energy costs alongside higher costs for other material inputs, is a cause for some worry. Measured by the Wholesale Price Index, inflation has been in double-digits, and the Consumer Price Index was also at a five-month high. The RBI may be looking to normalise policy now with a rate hike, or tightening money supply. Rupee bond yields have already hardened.

A 500-company sample of Q3 results, including many of the private sector majors, shows signs of inflation impacts. Expenses are up 65 per cent year-on-year for fuel and power costs, and other raw material costs are up 43 per cent. While revenues expanded by 25 per cent for this sample and profit after tax rose by 21 per cent, operating margins declined by 4 per cent due to higher expenses. The market will be braced for similar effects across the field, through Q3 and Q4.

The Budget has not changed much of the tax structure (though companies have complained that new limits on GST input tax credits could impact cash-flows negatively). This is a relief for most investors. But the plugging of tax loopholes for bonus stripping and dividend stripping could perhaps impact sentiment negatively and of course, crypto trading now falls under tax structure. On the whole, there were no major negative surprises, which in itself is good news for markets.

In terms of sectors, the capex orientation of the Budget will favour infrastructure, construction, cement, logistics, and green energy. Construction activity could flow backwards into steel, and equipment. There will be less focus on consumption.