Mumbai: Indian markets saw the sharpest post-budget gain in a decade as the Sensex, the nation’s bellwether equity index, rose 3.5% to close at 18,446.50 points on Tuesday, a day after finance minister Pranab Mukherjee presented the Union budget.
Short covering by investors and relief that excise duties were left untouched saw the index registering its biggest daily gain of 623.10 points in 21 months.
While analysts remain sceptical about Mukherjee’s fiscal deficit target of 4.6% of gross domestic product in 2012, they say the absence of any negative has driven the markets up as this comes after a week of volatile trading.
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The Bombay Stock Exchange’s (BSE) Sensex, which has been among the worst-performing indices this year globally, fell 2.8% last week as volatile trading during Thursday’s expiry of near-month derivative contracts, a sharp spike in crude oil prices and uncertainty on the budget spooked investors, and led to a build-up of short positions. Most Sensex peers fell 0.73-3.14% in the period as political uncertainty in West Asia drove up oil prices.
Short covering takes place when traders, who have sold shares they do not own in anticipation of lower prices, buy them to close the open position.
The outlook on the market, though, looks better than what it was last week, with oil prices coming off their two-year peak of $120 (Rs5,412 today) per barrel and the budget avoiding any measure that would harm the markets. Brent crude was trading at $112 per barrel on Tuesday.
Most analysts say global developments will largely drive the market from these levels, as negatives on the macroeconomy have been already factored in.
“The Indian market is back to the same level as it was last week and from here on it is back to business as usual with the Middle-East crisis and the price of oil as well as inflation numbers determining the market mood,” said Dhiraj Agarwal, director (institutional equities) at Standard Chartered Securities (India). “The rally so far has been led mostly by short covering.”
Sandip Sabharwal, head of portfolio management services at Prabhudas Lilladher Pvt. Ltd, said, “Current oil prices build in a lot of uncertainty and I would expect a correction which would help Indian markets rally in the medium term.”
The budget calculation also seems to be based on similar hopes. “The fiscal deficit target of 4.6% seems aggressive, with oil subsidies resulting from $100 crude potentially adding 70 basis points (bps),” said Parul J. Saini, director at Royal Bank of Scotland Asia Securities (Singapore) Pte Ltd.
The government could stick to the target of 4.6% even if oil prices averaged $100 in 2011, Reuters cited Planning Commission deputy chairman Montek Singh Ahluwalia as saying.
“He (Mukherjee) has committed himself to a 4.6% fiscal deficit. In a way, it does not matter how he achieves it,” he said. “I mean, in the course of the year, if things turn out to be different, and there are many things that could turn out to be different, he’ll have to do something.”
The consensus view among economists outside the government is that it will overshoot on spending, with economists at Deutsche Bank predicting it will exceed the fiscal deficit target by 50 bps and Citigroup Inc. estimating it will do so by 30-50 bps.
Despite scepticism on the fiscal consolidation front, analysts say the excessive pessimism in the run-up to the budget has dissipated as the budget did not have any negatives. Besides, status quo on excise duties was a positive for corporate sales, especially auto firms, which were the biggest gainers on Tuesday. While the BSE Auto Index was up 5.6%, interest-rate sensitive sectors such as banking and real estate were among the other gainers, rising by at least 4% each. In a rising interest-rate regime, consumers defer plans to buy automobiles and homes. Bank stocks also suffer as they run the risk of their bond portfolios eroding in value. Since the budget has projected 9% growth in fiscal 2012, many analysts say India may go slow in its rate-tightening cycle.
The National Stock Exchange’s volatility index, India VIX, which shot up to 27 in the run-up to the budget, has fallen 5 percentage points since then.
“We are seeing a build-up of long positions even by foreign investors who were shorting the market last week when crude prices had moved up,” said Siddharth Bhamre, head of derivatives at Angel Broking Ltd.
Ashwin Ramarathinam contributed to this story.
Graphic by Sandeep Bhatnagar/Mint