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Ahead of the Narendra Modi-led central government’s first full Budget on February 28, the markets have been making record highs — the benchmark indices, the BSE Sensex and the National Stock Exchange’s Nifty have gained five per cent each to date in calendar year 2015. Foreign institutional investors have pumped in close to Rs 18,244 crore ($2.88 billion) during this period.
In the current financial year so far, the indices have moved up nearly 30 per cent.
While there have been some global events like a 50 per cent decline in crude oil prices over the past few months to six-year lows, and liquidity injection by major central banks like the Bank of Japan (BoJ) and European Central Bank (ECB) amid policy action by the US Federal Reserve (US Fed), the Reserve Bank of India’s move to effect a 25-basis-point cut in the interest rate and to manage the rupee’s movement have aided sentiment. “The markets have already rallied over six per cent in January, on account of the ECB and RBI moves, and the anticipation that the Budget might offer sops for the manufacturing sector on an overall basis,” says Vaibhav Sanghavi, managing director, Ambit Investment Advisors.
Budget expectations
What might this Budget have in store, and what are the markets expecting from the finance minister this time? The markets, analysts say, have primed with the expectation that a thumping majority will give the government the political muscle to make progress on economic reforms. It had set the tone for that in the Interim Budget in July last year. However, lack of adequate time and spillover of fiscal commitments have limited the degree of freedom for the new government which has resulted in an underwhelming attempt towards reforms in its first Budget.
“The government will now have the opportunity to signal its unbridled economic priorities within the broader ambit of prudent fiscal consolidation. In my opinion, the beginning should be made with infusing credibility to fiscal arithmetic,” says Shubhada Rao, chief economist, YES Bank.
“On the revenue side, I do not expect any change in tax rates, as the economy is yet to show a meaningful recovery. But the government could earmark greater allocation for states to expedite the launch of GST (goods and services tax) from April 2016. In addition, the disinvestment agenda could be strengthened, with the government announcing a set of rolling targets, to make the process of additional revenue generation smoother,” she adds.
Jyotivardhan Jaipuria, India head of research, Bank of America Merrill Lynch, expects the government to stick to its fiscal consolidation path, aided by lower oil prices. He says the Budget is likely to focus on areas highlighted in the Bharatiya Janata Party’s (BJP’s) manifesto, such as industrial corridors, urbanisation, irrigation, and revival of the capital expenditure cycle through public funding and encouraging foreign direct investment in railway infrastructure and defence.
Market rally
In the 12 Union Budgets presented over the past decade, the BSE Sensex has recorded gains during the one-month period preceding the Budget on only two occasions.
Since 2004, when the Manmohan Singh-led United Progressive Alliance (UPA) government took office, the Sensex lost more than five per cent on three occasions — 2007, 2009 and 2013 — and delivered negative returns in the years 2008, 2010, 2011, 2012 and 2014.
There were two Budget presentations in the election years of 2004 and 2009 — an interim Budget in February, before the polls, and the regular Budget after the polls in July. Interestingly, on the previous two occasions when new governments presented their first Budgets, the market slipped between three and seven per cent in the one-month period before the event, data suggest.
While most analysts remain optimistic on the road ahead for the equity markets, they advise fresh investments to be made after the Union Budget presentation. “The Nifty is likely to remain in a range of 8,700 to 9,000 at least for a couple of weeks. In the second half of February, we can expect it to trade a tad above the 9,000 mark as Budget expectations start getting built in,” says Deven Choksey, managing director & chief executive officer, K R Choksey Shares and Securities.
“In case the markets rally far ahead of expectations, say Nifty trades around 9,200 to 9,400 in anticipation of the Budget, there are chances we will see a sell-off after the Budget. However, if the Nifty remains around 8,700 to 9,000, the sell-off magnitude might not be so high. One should wait for the proposals to be spelt out before making any fresh investment,” he adds.
