Investors should review allocations after weighing Budget, monetary policy

Not much change in macro terms

The interim Budget may offer selective comfort to some equity investors. But it does little to allay the fears of foreign portfolio investors who are worried about fiscal slippage. So it doesn’t look as though this Budget will spark a big bullish wave.
 
Three or four sectors did see upsurges during the Budget speech. One was the automobile sector, which was presumably being backed by punters who think that the Prime Minister  Kisan handouts, and higher Minimum Support Price (MSP), etc will stimulate better rural demand. 
 
A second sector, which did well was fast-moving consumer goods (FMCG), which would be a beneficiary of the same logic. If there is a rural demand recovery, FMCG is also likely to see better revenue growth at the least. This could spread to agro-centric sectors perhaps.

 

Two related sectors saw a more muted recovery. They were realty and home finance. There is something in the Budget for both. Extensions of tax breaks give realtors a little more time to try and shift massive unsold inventory. At the same time, tax breaks for notional income on a second, self-occupied flat could induce the middle-class to look at the realty sector with more interest. This could mean better volumes for housing finance.
 
However, while housing finance companies staged a minor recovery, the broader non-banking financial companies (NBFC) space saw little enthusiasm from the market. Public sector banks continued to take a hammering.  The commodity sector crashed. This was partially due to poor results for Vedanta but metals in general, have done badly for a while. This was unconnected to the Budget of course, except in the negative sense that it doesn’t have any sort of bailout plan aimed at commodities.

 
There are now a couple of interesting question marks about the rupee, which lost a little ground on Budget day. If the fiscal deficit does expand beyond the estimate of 3.4 per cent of the gross domestic product (GDP) — and this is guaranteed — the foreign portfolio investors (FPIs) and credit rating agencies won’t like it. This could mean a weaker rupee since FPIs will cut back India allocations if they don’t trust the fiscal estimates. 
 
A weaker rupee would once again, make the information technology (IT) sector look attractive and it is doing well anyhow, on the basis of Q3 results and advisories. A weaker rupee may feed into other export-oriented sectors too. 

 
The second question mark about the rupee is based on the Monetary Policy Review due this week. How will the Reserve Bank of India (RBI) respond to the Interim Budget and to the drastic upwards revision of growth estimates just before the Budget? Given low inflation and earlier assumptions of slow GDP growth, a rate cut looked to be entirely possible. But if the RBI buys into the new, higher GDP growth estimates, it might maintain status quo.
 
The odds are probably tilted in favour of a status quo decision by the Monetary Policy Committee (MPC). That would disappoint the market and it might set up the banks for another round of hammering. Since the Budget doesn’t tilt towards fiscal prudence, there could also be an uptrend for bond yields.

 
Net-net, the Budget seems to be mildly positive for the stock market but rural sops were expected anyway. So the positive surprise is not so strong. The fiscal deficit assumptions are quite optimistic and FPIs could reduce India-exposure as a result of their own internal assessments that the fiscal deficit will be higher than the estimate. Going forward, a weaker rupee seems like a reasonable assumption, unless the MPC pulls some sort of rabbit out of the hat.
 
There are no specific Budget elements that should induce major portfolio-reallocation for the average investor. There’s nothing directly on the tax side to encourage shifts from equity into debt, or vice-versa.

 
However, there are clues that could induce investors to cut down on medium-term debt exposure and maybe, increase precious metal exposure. One is, as stated above, the chance that bond yields could trend up. Meanwhile, gold and silver could see some gains, if the Budget leads to a weaker rupee. At the same time, debt funds will see capital losses if bond yields do go up.
 
The Budget therefore, doesn’t change too much in macro-economic terms. But investors should review their allocations after they’ve weighed up the Budget and the MPC review. If the combination leads to a weaker rupee, it might be useful to tweak portfolio allocations.