It’s Budget week but be ready to book profits

March 11, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

The markets ended in negative territory for the third straight week after the ruling Congress party suffered a setback in the recently held assembly elections, clouding the government’s ability to push major economic reforms. However, a sharp pullback of 2 percent seen on Friday saved the indexes from suffering major losses.

Contrary to popular belief of a Samajwadi Party-Congress alliance, the SP’s landslide victory resulted in the Congress being relegated. The less-than-impressive performance of the Congress would lead to the government pushing through more populist measures in a desperate bid to woo voters before the next general elections. If that happens, the Indian economy could further sink into a downward spiral, further wrecking the country’s finances.

Coming back to the stock markets, the primary markets got a booster with the stellar performance of the Multi Commodity Exchange (MCX) offering. The issue that had got subscribed 54 times got listed with a hefty premium of 38 percent over the issue price of 1,032 rupees. This goes to show that if priced correctly with sufficient money left on the table for investors, a public offering can sail through quite well. At current prices, MCX is available at 19x its FY13E EPS of 70 rupees. The key risk on the regulatory front is the probable introduction of commodity transaction tax in the upcoming budget, which could hamper trading volumes. Given the recent sharp gains, investors could book out partial profits at current levels.

Now that the assembly elections are over, the focus will shift to the two┬áimportant events this week — the credit policy review and the Union Budget. The coming week might be the busiest week for 2012. Ahead of its policy review meet, the central bank surprised with a 75 basis points cut in the Cash Reserve Ratio (CRR). This larger-than-expected cut will ease systemic liquidity and signal a shift in monetary stance from an anti-inflationary one to a pro-growth mode. The coming RBI monetary policy meeting on March 15 may be a non-event and a cut in the repo rates is not expected until April. Similarly, before the Railway Budget on March 14, the railway ministry has increased freight rates across product categories by 20 pct – 32 pct. Thus, the upcoming railway budget may also turn out to be a non-event.

The finance ministry is considering a proposal to increase excise duty to 12 pct from 10 pct in the Union Budget due to widening fiscal deficit. Investors will also look for a possible road map for implementation of the Goods and Services tax (GST). Although, the introduction of the Direct Taxes Code is highly unlikely from April 1, some of the provisions of the proposed law may be incorporated in this Budget.

A cut in Securities Transaction Tax (STT) also seems to be on the cards which will lift investor sentiment and boost equity volumes. The finance minister had earlier circulated a note on a proposal to lower STT and widen the tax net to other assets such as commodities. An increase in the exemption slabs for personal income tax is also in the offing. One needs to see how the finance minister does the fine balancing act looking at the huge fiscal deficit. The recently released trade deficit data wasn’t too encouraging and rising oil prices will force the minister to revise subsidy estimates.

Apart from the Railway and Union Budget, IIP data would be released on Monday and WPI data on Wednesday. Industrial production is seen rising 2.1 percent in January 2012 after registering a dismal 1.82 percent growth in December while WPI inflation for February is projected at 6.7 percent.

As expected, the Nifty witnessed buying interest around 5200 levels last week. With a bunch of events lined up for the coming week, the markets are set for extreme volatility but with a positive undertone. With a surprise pre-policy cut in CRR, the markets may open higher on Monday with cues from IIP data leading the direction for the rest of the day. As the markets are entering budget week with minimal expectations, any surprise from the finance minister will see the markets rallying beyond the 5500 mark but a disappointment could swing it to closer to 5000 levels. It would be advisable to book profits to a certain extent if we one witnesses over-exuberance before the Budget.

However, the bigger trigger for the markets will come in the form of rate cuts from the RBI as and when it happens. As the markets have the tendency of over-reacting to any given event, I will not be surprised if the Nifty takes out its previous all-time highs later this year provided the FII flows continue to be supportive and government policies don’t weaken the economy further.

Full coverage of Union Budget 2012

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