Markets may be headed for more losses, say analysts

Markets may be headed for more losses, say analysts

Mumbai: Indian markets fell sharply on Monday for the third consecutive trading session and could be headed for more losses after the Union budget failed to boost investor sentiment, analysts said.

Investors have sold stocks across sectors after they found very little in Friday’s budget that would spur growth and cut government spending to tame inflation. Rising crude oil prices, near a 43-month high of $125.5, have also contributed to the fall.

The 10-year benchmark government bond yield neared this year’s highest level of 8.43% on fears that the government may overshoot its record-high borrowing target of Rs5.7 trillion, budgeted for the next fiscal, and lead to a glut of securities.

The government’s spending on its various welfare schemes exceeded the Street expectations and investors fear that higher spending, coupled with tax increases, could be inflationary and shrink the possibility of interest rate cuts by the Reserve Bank of India (RBI). The Indian central bank will unveil its annual monetary policy for fiscal 2013 on 17 April.

Stocks are likely to fall unless a renewed surge in global liquidity lends support, analysts said.

“On an overall basis, the budget will have a negative impact on the equity market," said Neelkanth Mishra, director of equity research in India for Credit Suisse Group AG. “The rally this year was based primarily on three expectations—a positive outcome of Uttar Pradesh (UP) elections for the Centre, rate cut by RBI on 15 March, and announcement of key reforms in the budget, with tough decisions for fiscal consolidation."

The Congress suffered a debacle in UP elections.

RBI kept policy rates unchanged in its mid-quarter review last week and said it will not cut rates as long as inflation risks remain. Investors were already disappointed on the first two counts, and now, after the third disappointment, stocks are headed for a correction, Mishra said. The inability of the government to adopt a path of fiscal consolidation despite higher revenue from various measures has disappointed investors.

The revenue-enhancing steps in the budget include rolling back excise duty cuts introduced in 2008, increase in service tax as well as widening of the service tax base and auction of spectrum for telecom companies.

Rating companies Standard and Poor’s (S&P) and Moody’s said on Monday that the Union budget will weigh negatively on India’s credit rating, making overseas loans expensive. The chances of India tightening its finances ahead of the general election in 2014 are remote, S&P said in a release.

Although the government’s arithmetic for the next fiscal appeared more credible compared with the current one, analysts said the government is unlikely to meet the fiscal deficit target of 5.1% of the gross domestic product (GDP). In fiscal 2012, the fiscal deficit is estimated to reach 5.9%, 1.3 percentage points higher than the budgeted estimate.

“In fiscal 2013, the fiscal deficit could be 70 basis points higher than the government’s estimate of 5.1% as it has under-budgeted subsidies and made optimistic revenue projections," said Tirthankar Patnaik, strategist and economist at Religare Capital Markets Ltd. One basis point is one hundredth of a percentage point.

The subsidy bill, at Rs1.9 trillion for the next fiscal, is 12% less than the estimated expenses for the current fiscal and the government is likely to miss the mark, according to economists. The Union government’s subsidy bill in fiscal 2012 is estimated to be 50% higher than the budgeted at Rs2.1 trillion. Revenue projections also appear optimistic and are based on a gross domestic product growth assumption of 7.6%, which is unlikely to happen, economists said.

Anirudh Laskar and Ashwin Ramarathinam contributed to this story.

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