The open letter formula is now employed so often that it invokes tedium, rather than impacting opinion. But it does indicate top-of-the-mind concerns. Two weeks after the Bharatiya Janata Party (BJP) won a historic election, the open letters are largely about the economy.
The Budget, will be a mega-signalling device in terms of policy, as well as a document outlining public finance projections. Of course, everyone wants to know if the fiscal deficit estimates match closely with those made by the previous government. But more than that, the nation (and overseas investors) wants to know what the new government can do to accelerate gross domestic product (GDP) growth from the anaemic 4.7 per cent achieved in 2013-14. (SELLING ON NEWS)
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Can Arun Jaitley meet expectations that are larger than life? He has six weeks to craft a Budget, which delivers on the following areas: relaxation of foreign direct investment (FDI) regulations in many areas, including defence (his other portfolio); a timeline for implementing the Goods and Services Tax, which the BJP blocked while in Opposition; clarity on retrospective changes to taxation laws; a coherent disinvestment programme; rationalisation of fuel and fertiliser subsidies. Plus, there is the usual clamour from industry associations soliciting for lower excise imposts and tweaks to customs rates.
More broadly, this Budget will also be audited for job-creation potential. It will take policy reform to translate demographic dividend into millions of new jobs and higher GDP growth. The BJP's mandate was largely in the hopes that it could deliver on these specifics.
It is almost certain that the Reserve Bank of India (RBI) will maintain status quo and wait upon the Budget without tinkering with either policy rates or money supply. By mid-July, there will be clarity about the monsoons as well, which means that food inflation projections will be possible. Once he has a chance to assess the direction of government policy, Raghuram Rajan might take calls on the "glide path of inflation" and change policy rates perhaps.
The RBI will also have to keep managing the rupee cleverly. The foreign institutional investors (FIIs) have brought in a flood of cash and this pushed the dollar/rupee to Rs 58-59/dollar. At those levels, exports have dwindled. If FII buying continues and FDI also starts flowing in, the RBI will have to continuously recalibrate desired rupee levels.
Banking remains in stress. This has been a horrible year for lenders, with non-performing assets (NPAs) swelling, and stag-inflation. Public sector undertaking banks, in particular, are under pressure. The latest to be hit in terms of a stockmarket sell-off is J&K Bank, which has seen rumours of very high NPAs surfacing. The high weight of the banking sector in broader indices such as the Sensex and Nifty make it difficult to envisage a scenario where the Nifty can rise substantially if the Bank Nifty falls. This is especially true, since high-weight export industries, information technology and pharma, are also not doing so well due to the strong rupee.
Given the large expectations, the market may be disappointed with the Budget, regardless of the real merits. This could turn into another case of "buy on rumour and sell on news" as indeed, many budgets are.
The post-election scenario has already seen some selling on news. The expectations of a BJP win drove the market into the stratosphere. There has been quite a bit of profit-booking since. One cause of disappointment has been the realisation that Narendra Modi doesn't have much in the way of political talent to tap for Cabinet appointments. Nor can he centralise decision-making at the Centre in the same manner that he famously did in Gujarat. He will have to empower the bureaucracy and ministers to take decisions and hope they get things right.
On the external front, the European Central Bank is indicating that it will keep money supply loose. The US stockmarket has rallied to new heights despite (or perhaps because of) one per cent contraction (annualised) in January-March 2014 GDP. This is being written off as weather-related, with strong growth and reduced jobless claims seen so far in Q2 (April-June).
The American Quantitative Easing 3 continues to be gradually scaled back. Now, there are also quiet murmurs out of Japan about a tapering of the 13-month quantitative expansion programme that is the foundation of Abenomics. If those rumours are substantiated, traders will revisit assumptions about the 6 trillion Yen (about $60 billion) that the Bank of Japan pumps out every month.
The Reliance-Network 18 announcement is being viewed with a degree of puzzlement since the RIL open offers are below current market prices in a couple of cases. The PricewaterhouseCoopers report on the MCX is believed to contain some damaging details about insider transactions. Further revelations on this front could be expected.
The options market has seen calming down. The Volatility Index or VIX indicates that implied volatility is falling, which is usually a sign of a bull market. Domestic institutional investors have been heavy net sellers through the election season. It will be interesting to see if there's a change in attitude.
There has been massive selling at close to Nifty 7,500 levels. There looks to be some support at the current 7,200 level and below, at roughly 50-point intervals. The Nifty could, therefore, range trade with an upside bias until such time as the Budget is announced.