BackMarkets swing on fiscal worries, hope of rate-hike pause
From the previous budget on 1 February, 2018, till date the markets have not improved muchAhead of the general elections in April-May, the interim budget for 2019-20 had a strong focus on the rural and agricultural sector
PremiumThe interim budget led to wild swing in the markets as investors remained worried about fiscal discipline with the government’s thrust on consumption-boosted sentiment on Friday. The Sensex closed at 36,469.43, up 212.74 points or 0.59%, while the Nifty was at 10,893.65, up 62.70 points or 0.58%.
From the previous budget on 1 February, 2018, till date the markets have not improved much as the Sensex rose 1.57% while the BSE MidCap and BSE SmallCap fell 15.23% and 25.47%, respectively. Fears of a global slowdown, high crude oil prices and a weak rupee weighed on equities.
The India VIX index, the so-called fear index, fell 8.2% to 15.72. The volatility index typically has an inverse correlation with the benchmark indices. VIX is the investor’s perception of the market’s volatility in the near term. The low number indicates that investors are not expecting any major correction, at least over the next month.
Ahead of the general elections due in April-May this year, the interim budget for 2019-20 had a strong focus on the rural and agricultural sector, sops for the middle class and workers, along with a broader social push. However, there was a marginal slippage in the 2018-19 and 2019-20 fiscal deficit targets, resulting in a sharp increase in the borrowing quantum.
The government missed its 2018-19 fiscal deficit target of 3.3% of GDP and instead pegged it at 3.4%. It also budgeted the 2019-20 fiscal deficit target at 3.4% of GDP, missing the glide path target of 3.1%.
“Overall, the government presented an expansionary budget and prioritised populism over fiscal prudence. The deviation from the 2018-19 fiscal deficit target and the 'pause' on 2019-20 fiscal consolidation is a negative surprise, relative to our expectations," said Nomura in a note on 1 February.
It, however, added that the cumulative effect of the cash transfer to farmers and the middle income class will provide a boost to consumption, but likely at the cost of crowding out private investments. “This growth mix generally tends to be a negative for macro imbalances," Nomura added.
Economists said the Reserve Bank of India will be cognizant of the risk to inflation from fiscal slippages going forward and hence expect the RBI’s Monetary Policy Committee (MPC) to keep rates on hold in the upcoming policy review. Nomura expects the central bank to keep the repo rate unchanged in the monetary policy review on 7 February.
Radhika Rao, Economist, DBS Group Research, also expects the RBI to keep interest rates on pause for the rest of 2019. “The government’s announcements suggest that economic priorities have taken precedence over near-term fiscal consolidation as the 3% fiscal deficit target stands delayed. The consumption push and growth stimulus will be positive for growth, but limits scope for an aggressive monetary easing cycle," said Rao.
India’s 10-year government bond yield rose nearly 10 basis points on Friday as analysts expected the government to face challenges in meeting its target for fiscal year 2020. The yield on the most traded 2028 paper ended at 7.611%, up 13 basis points from its previous close of 7.483%. Bond yields and prices move in opposite directions.
The rupee fell 0.24% to 71.26 to a dollar from its previous close of 71.09. The home currency opened at 71.07 to a dollar.
Moody’s Investors Service said that no new policies to increase revenues were announced, while a number of expenditure measures were announced that will increase outlays and put pressure on the government’s ability to meet its fiscal deficit target. Moody’s is concerned that the continued slippage will be credit negative for the sovereign.
The government on Thursday revised upwards the economic growth rate upwards to 7.2% for 2017-18 from the 6.7% estimated earlier.
(Ravindra Sonavane contributed to the story)
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
