Calm on the Street

The lack of fresh negatives in the Budget helped maintain market momentum

The stock markets cheered the Budget with a 0.86 per cent rise in the Sensex, with the index closing at 10,370 points. Of the past 12 pre-Budget days, the stock market went up on eight occasions, but this is the second consecutive year when the index has hit an all-time high on Budget day.

If the Budget did not have any major positive for the markets, the lack of negatives surely helped in maintaining the momentum.

In a bull market where investors have made huge profits, the 25 per cent increase in securities transaction tax, which all market participants have to bear, looks insignificant, considering that there are no long-term capital gains tax and a small short-term capital gains tax at 10 per cent.

The markets have been on a roll since the fall in October 2005. The pre-Budget rally, which began in mid-January has seen the market reaching new highs everyday.

In the past 14 trading sessions before the Budget, the Sensex closed over 10,000 points on 13 days. The broad-based BSE-500 index, which had taken a breather, after peaking in mid-February, also closed at a new high on Tuesday.

On the macroeconomic front, the numbers look positive. The finance minister's strategy to increase the taxpayer base, rather than increasing tax rates seems to be working well as the tax-GDP ratio has gone up from 9.2 per cent in 2003-04 to 10.5 per cent in 2005-06. The revised fiscal deficit at 4.1 per cent in 2005-06, which is lower than the estimated 4.3 per cent, has pleased investors.

The market has taken the thrust on agriculture as a necessity for the country and not reacted adversely. The announcements for improvement in infrastructure also thrilled the market. The peak import duty has come down from 15 per cent to 12.5 per cent.

At the industry level, the Budget is good for a few sectors. The reduction in excise duty on small cars will benefit Maruti and Tata Motors, with both stocks touching new highs.

Increased outlay for power generation has resulted in rising stock prices of power equipment manufacturers such as Bhel, Alstom Projects and even NTPC reaching new highs. Thanks to the road projects, cement stocks gained. ACC, Grasim and UltraTech made new highs. There were benefits for companies in tea plantation, paper, hotels, and gems and jewellery sectors.

Nevertheless, the advance-decline ratio was negative due to a fall in public sector undertakings, healthcare, infotech and mid-caps.

The inclusion of fixed deposits of not less than five years under Section 80C could open the tap for banks to improve deposit growth rate, which has not kept up with loan growth in the recent past.

With mutual funds being allowed to invest a higher amount abroad without caveats, domestic investors could also look forward to benefiting from investing in foreign stocks or indices.

The markets are likely to remain bullish. Liquidity is robust from the key investors, FIIs, which do not have any reason to complain about the Budget. India looks attractive compared with other markets. Reforms are in process, and the GDP growth is expected to remain robust. Plus, the fiscal situation is only getting better.

With contributions from Amriteshwar Mathur