3 reasons why the Sensex rallied 486 points on Budget 2017 day

Broader markets also rallied in tandem. The BSE Mid-cap, BSE Small-cap indices gained 1.7% each

Markets gave a thumbs up to the Budget 2017 proposals by finance minister Arun Jaitley, with the S&P BSE Sensex and the Nifty50 indices settling nearly 1.8% higher each at 28,142 and 8,716 levels respectively. This is the first time since October 25 that the Nifty50 index has closed above 8,700 levels.

Broader markets, too, rallied in tandem. The BSE Mid-cap and BSE Small-cap indices closed 1.7% higher each.

"The government had a tough call of treading very carefully between the need for stimulating demand in a weak economic environment after demonetization and continuing on the path of fiscal consolidation. It needs to be complemented for bringing in greater transparency in political funding and relaxing the domestic transfer pricing rules. It has allocated higher sums for farmers, rural population, youth, poor and underprivileged, infrastructure etc, which will have a ripple effect on the formal economy with a lag,” said Dhiraj Relli, MD & CEO, HDFC Securities.

Here are three reasons why the Sensex rallied 486 points post the Budget 2017 proposals were unveiled:

Budget skips changes to tax treatment of capital gains on shares: Contrary to market expectation that the finance minister Arun Jaitley could recast the tax treatment of shares, the budget has left the long term capital gains (LTCG) and the securities transaction tax (STT) steady. Although the Finance Minister allayed investor's concerns as regards LTCG tax, analysts expected that the holding period of equities could be changed from one year to two.

"We feel a slew of measures to boost consumption and no change in the LTCG has gone down well with the markets. Put together, things look favourable for here on but we advise to maintain positive yet cautious approach, considering the overbought market conditions," said Jayant Manglik, President – Retail Distribution at Religare Securities.

"If the market reaction was the indicator, FPIs appear to be a happy lot. The much awaited relief from indirect transfer provision sees the light of the day. There is a proposal to provide a blanket exemption to category I and II FPIs from the indirect transfer provisions. There were expectations in relation to changes in the law to provide clarity on GAAR applicability to FPIs. It appears that, for now, the clarification provided through a recently issued Circular as regards inter-play of LOB provisions and GAAR shall be the only guide. This leaves some other issues around impact of selection of jurisdiction and availability of treaty benefits open to interpretation," says Pranay Bhatia, Partner – Direct Tax, BDO India.

Adding: "Capital gains regime for investment in shares appears to remain untouched with no announcements in the speech. This is a welcome relief to continue providing impetus to investment inflows in Indian capital markets."
 

Fiscal prudence: The markets also cheered the fiscal deficit target of 3.2% for FY18. This came in-line with expectation of 3% - 3.5%. Overall, the government’s decision to stick to fiscal consolidation – despite the growth hit caused by demonetisation and the upcoming state elections – is a positive signal, analysts say.

"The government stuck to its path of fiscal consolidation, targeting its fiscal deficit at 3.2% of GDP in FY18 (year ending March 2018) from 3.5% in FY17. This is marginally better than consensus expectations (3.3%), but slightly higher than our estimate (3.0%). The middle path balances the need for higher public infrastructure spending with the medium-term need for continued prudence," said Sonal Varma, executive director and India Economist at Nomura in a post Budget note.

"FM's fourth Budget, has put India back on the shopping list of FIIs. By restraining the fiscal deficit to 3.2% and promising to prune it down to 3% in the next year, FM has delivered on Fiscal prudence. All this has come about amidst 25% hike in government spending and a 19% reduction on Government borrowing. This also increase chances of a rate cut," adds Relli of HDFC Securities.

Focus on infrastructure spending: Continuing with its earlier stance of increasing infrastructure spend, Budget 2017 maintained its focus on the infrastructure sector, besides focusing on the agri sector and rural India. In a pre-budget note, JP Morgan had expected an increase in infrastructure spending in priority areas such as roads, railways, power and housing, to provide some impetus to the economy impacted by demonetisation. 

The real estate sector, which was the hardest hit by demonetisation, will be one of the major beneficiaries of this budget, experts say.

"The permission to complete Affordable Housing Projects in five years instead of three years to qualify for Tax exemption in 80IB is a relief. The relief in capital gains tax on real estate properties announced in the Budget is a welcome step as it would help enhance investment as well as demand in real estate sector," says R K Arora, chairman, Supertech Ltd.

"Changes in the taxation aspect of JDA (Joint Development Agreement) will encourage more land owners to partner with developers that will effectively bring down the cost of construction. Focus on new roads, improvement of existing roads and providing coastal connectivity will again boost development within the real estate sector,” adds Shishir Baijal, chairman & managing director, Knight Frank India.