Mumbai: Higher fiscal deficit and an apparent lack of road map for reforms in Pranab Mukherjee’s Budget on Monday pulled down the Sensex, India’s most tracked equity index, by 5.83% or 869 points, the sharpest-ever decline on any Budget day, but most analysts and fund managers retained the positive outlook on markets.
“Fundamentally, there is no substantial change for the earnings outlook of the corporate sector,” said Bharat Iyer, head of research at JPMorgan India Pvt. Ltd. “The finance minister has gone for continuity and stability in the backdrop of an uncertain global environment and weak monsoon.”
Ahmed Raza Khan/Mint
With no concrete proposal in areas such as disinvestment in public sector undertakings and foreign direct investment, or FDI, in critical industry segments, punters who had built positions offloaded their investments, bringing the market down, said traders.
They also said that the market didn’t like the projected 6.8% fiscal deficit, which would lead to higher government borrowing. This would crowd out the private sector and push up interest rates. In the interim Budget presented in February, the fiscal deficit was estimated at 5.5%.
The 30-stock Sensex closed at 14,043.4 points on Monday. The broader Nifty index, which has 50 stocks, fell 5.84% to close at 4,165.7. The fall in equity indices eroded some Rs2.54 trillion of paper wealth of investors. And the fall in indices was not triggered by any nasty surprise but by the lack of any signal on reforms that the market was eagerly waiting for.
Indeed, brokers and fund managers are blaming high expectations from the Budget and a sharp rise in indices in the run-up to the Budget for Monday’s market fall.
“The markets had gone up sharply in the past few days in the run up to the Budget,” said Deepesh Pandey, co-head of investments at India Infoline Ltd, a financial services group. “They were expecting a lot on disinvestment, FDI and visible plans to bring down the fiscal deficit.”
Since the comfortable victory of the Congress-led United Progressive Alliance in mid-May, the markets have risen sharply, pushed by hopes of reforms from a stable government that would not need to rely on support from the Left parties for its survival.
The Sensex had risen 22.51% since the elections till Friday before the crash on Monday. This rise was in sharp contrast to other markets across the globe, which have been weak for some time now on fears that the global economic recovery may take longer than expected.
Indian investors have been buying local stocks for some months now on hopes that the government would push reforms that would lead to a recovery in the second half of this year. But after Monday’s crash, analysts expect the local markets to move more in tandem with other emerging markets.
Banking and construction stocks were the hardest hit on Monday. The BSE Bankex, index for bank stocks, fell 8.17% on concerns that the government’s large borrowing programme would push up interest rates. Bond yields rose after the Budget announcement and prices dropped. Rising yield will force the banks to make mark-to-market losses on their bond portfolio. Mark-to-market is an accounting practice of valuing a financial asset in accordance with its market value and not at the cost at whichit is acquired. Bond yields and prices move in opposite directions.
Also, higher interest rates will come in the way of corporate borrowing and if companies do not borrow money and invest, economic growth will slow down.
The finance minister also made it clear that “public sector enterprises such as banks and insurance companies will remain in the public sector”. There had been widespread expectations that the finance minister in his Budget speech would signal bringing down the government stake and rise in FDI in banks, besides consolidation to build the scale.
The construction sector too fell sharply, despite the government commitment to spend more on roads, power and irrigation.
But infrastructure still remains the favourite for most fund managers, with the Budget introducing new financing schemes for the sector, boosting spending by 23% for its road construction programme, 87% for urban infrastructure and more than doubling its allocation for improving power supplies.
“We are bullish on the infrastructure and domestic consumption-related sector,” said Navneet Munot, chief investment officer of SBI Funds Management Pvt. Ltd. “The long term story remains intact.”
Ahmed Raza Khan / Mint
The finance minister has put more money in people’s wallets by scrapping a surcharge on personal income tax, increasing tax-deductible income and abolishing the fringe benefit tax and this has encouraged many fund managers that Mint interviewed after the Budget on Monday to keep their outlook for the broader market unchanged.
They also said Mukherjee still had policy flexibility. “You can’t conclude that the government would not do anything on areas such as insurance or the 3G (third generation) spectrum auction,” said Sameer Narayan, head of equities at Fortis Investments. “He hasn’t said much about what’s already in process such as the insurance bill.”
Indeed, in his Budget speech Mukherjee said that “a single Budget speech cannot solve all our problems, nor is the Union Budget the only instrument to do so.” According to analysts, following the Budget day fall, valuations of Indian stocks have become “reasonable”.
“After the election outcome, valuations were getting overstretched,” said Mukkaram Bhagat, executive director at ASK Investment Holdings Pvt. Ltd. “Now fundamentals should guide the stock market.” JPMorgan’s Iyer said the markets would trade in a range of 12,500-16,500, there is “no reason for the range being broken” by the Budget.