Indian stock indices moved in a tight range and closed virtually unchanged over a one-month period ending Thursday, as investors kept a wary eye on populist steps expected from Friday’s interim budget that could disrupt fiscal prudence.
According to Bloomberg data, in the one-month period ending 31 January, the 30-share benchmark Sensex index was up a meagre 0.01%. Had it not been for Thursday’s 665.44-point surge, the index would have closed 1.83% lower for the month. The National Democratic Alliance (NDA) government presents its last budget—an interim one—at 11 am on Friday.
In the one-month period ahead of the interim budget in 2014, the Sensex was down 3.95% in the one-month period ahead of interim budget presented on 17 February. However, in the two interim budgets before that—in 2009 and 2004, the index had gained 3.34% and 2.24%, respectively, in the same period.
The Sensex’s Thursday surge was primarily due to a dovish statement from the US Federal Reserve on monetary policy, which drove equities higher worldwide. The benchmark index rallied 1.93% during the day, before ending up 1.87% or 665.44 points at 36,256.69 points, while the broader Nifty index closed at 10,830.95 points, up 179.15 points or 1.68%.
According to Vinod Karki, vice president (strategy) at ICICI Securities Ltd, the Fed’s ‘patient’ stance may help support emerging markets currencies including India against the dollar and could arrest major outflows of foreign institutional investor (FII) funds from India, but this need not necessarily mean return of significant FII money to India.
“In the latest commentary, the Federal Reserve seems to be less confident about US economic growth. For emerging markets like India, the best scenario that has been made out is that US growth will slow down but may not slip into recessionary risks. Hence, outlook for EMs with improving growth prospects becomes relatively better. Slower growth and muted expectations of further rate hikes in the US is expected to keep US dollar and bond yields moderate resulting in support to EM currencies," he said.
Higher interest rates in the US generally lead to outflow of foreign funds from emerging markets considered to be riskier assets. FIIs have sold $496.08 million worth Indian shares in January so far. Domestic institutional investors which were net buyers of shares worth ₹3,781.19 crore in the month, have kept the liquidity intact in markets so far.
However, analysts said the markets are concerned that in the absence of new revenue-boosting measures, lower revenue from disinvestment and shortfall in the GST collection, it will be difficult for the government to achieve its fiscal consolidation objectives in the interim budget.
Analysts at Nomura said the outlook on fiscal deficit taking into account off-budget financing will be the key to watch out for in the interim budget. “Being a pre-election budget, we expect some populist measures. While declines in oil prices and resultant reduction in current account deficit and benign inflation are the key positives, fiscal risks and political uncertainty are likely to keep market valuation expansion in check. Given the current macro environment and our expectation of revival in corporate earnings growth, we assess the fair value range for the market at 15-17 times one-year forward earnings," Nomura said in a report on 30 January.
Kotak Economics Research said the budget will likely provide for medium-term revenue buoyancy amid uncertainty from GST collections, focus on the rural sector and infrastructure expansion and continued fiscal consolidation. “We note that the while the government may not detail specific programs in the budget, it is likely to provide a direction to its policies and focus areas. This assumes importance as the economy moves into a phase of relatively slower growth and waning prospects for rural demand growth," it said in a note on 22 January.
Ravindra Sonavane contributed to this story.