India Market Weekahead: Global markets, FII action to be primary drivers

March 18, 2012

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

It was a flattish close for the markets in what was supposed to be an eventful week. But the biggest event — the budget — turned out to be a non-event.

The markets, which initially began on an upbeat note, felt let down after disappointment on the policy review and the budget front. As expected, the Nifty kissed 5500 early during the week but gave away its gains to finally close at 5300 levels.

The finance minister played it safe and refrained from announcing any radical reforms in the budget. The government failed terribly on the fiscal deficit front –5.9 pct of Gross Domestic Product (GDP) for FY12 against a projected deficit of 4.6 pct of GDP. The deficit target for the next fiscal has been pegged at 5.1 pct of GDP which may be difficult to achieve yet again. We hope the slippages may not be as bad and expect it to reach 5.5 – 5.6 pct of GDP in FY13.

Gross market borrowings for FY13, pegged at 4.8 trillion rupees, may increase further on fiscal slippages. A high target for market borrowings is likely to keep bond yields under pressure. What is even more disheartening is the budget did not give any clear roadmap for bringing down expenditure in the form of subsidies. Even the disinvestment target of 300 billion rupees was quite disappointing as how the government will achieve this remains obscure. If one were to take a leaf out of the ONGC experience, even doing 50 billion rupees would be difficult. The key would be pricing of the issues.

As expected, the implementation of key measures such as the Goods and Services Tax (GST) and Direct Taxes Code (DTC) has been left to a later stage with only a token mention of 49 pct FDI in the aviation sector. The final rollback of the stimulus doled out to the economy in 2008-09 was announced in this budget by hiking excise duty and service tax by 2 pct each.

Market specific announcements like the reduction of Securities Transaction Tax (STT) by 20 pct on delivery trades were below market expectations as delivery trades form a miniscule portion of the overall volumes.

Even the increase in the income tax exemption slab from 180,000 rupees to 200,000 rupees fell short of expectations. The Rajiv Gandhi equity scheme, though it may have a good intent, may turn out to be another fiasco like the National Pension Scheme.

A retrograde step in this budget has been retrospective amendments to the Income Tax Act which question the stability and continuity of the legal framework especially from the point of the view of a foreign investor.

Overall, there is some attempt towards consolidation, but not enough to mark a shift in the overall fiscal stance. The stock markets seem to be attuned to the fact that the government is constrained by political and fiscal considerations and as such there were modest expectations from this budget.

However, the finance minister has perhaps missed out on his last opportunity before the general election in 2014 (or earlier in case of a mid-term poll) to take bold policy decisions.

Now that the major domestic events that could influence the market are over, the global market and FII action would be the primary drivers from Monday. The next set of domestic events would be the Q4 FY12 results starting in the second week of April followed by the Reserve Bank of India’s monetary policy. There is now increased uncertainty on policy rate cuts in April as crude oil prices continue to rule higher. Bond yields have hardened — reflecting nervousness in the debt market over the possibility of policy rate cuts next month. Crude oil will also be closely watched as higher prices will hurt fiscal balances further.

Sector-specific activity is likely. Automobile stocks will be watched as excise duty on large cars has been hiked from 22 pct to 27 pct. Vehicle sales may drop in April as fear of higher excise duty especially on diesel vehicles advanced purchases before the budget. Power and capital goods stocks may correct as the budget did not provide any relief to the ailing sectors.

The market may again sway in the 5000 – 5450 range in the absence of any further near-term triggers. The markets have started pricing in a rate cut in April which now seems more difficult than earlier. Thus, Nifty is expected to tread lower in the coming week with levels of 5200 being the important support zone. In case we break those levels, we are staring at 5000/5050.

For the UPA, there is still a possibility of a political realignment with the Samajwadi Party which could act as a boost. Unless the government takes any further retrograde steps, the Indian markets will continue drawing international liquidity which will keep interest high. Reiterating my earlier suggestion — one should look at topping up the portfolio between 5000 and 5200.

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