The stock market’s delayed response to Budget 2013

March 11, 2013

(Any opinions expressed here are those of the author and not of Reuters)

Finance Minister P. Chidambaram tried to humour the market in his budget by cutting the Securities Transaction Tax (STT) which had been one of its sore points. But the market was not amused. The Sensex continued to slide, indifferent to the budget which was presented with a lot of expectations.

This appears to be rather strange because the budget was well received by the industry, in spite of the increase in surcharge from 5 to 10 percent. It was possibly the realization that the finance minister lived up to his promise of cutting fiscal deficit to 4.8 percent which created an infectious confidence in growth revival.

Chidambaram could have hardly done anything more, considering there were economic and political compulsions he could not ignore. No big bang was possible and no big tax mobilization was undertaken.

The reduction in fiscal deficit was a good reason for the market to have responded positively to the budget. Because it would start a chain of events that could see the industry recover from a stalemate. First, the additional borrowing by the government in 2013/14 would be small and would not crowd out the financial market. Second, the Reserve Bank of India (RBI) has been harping on a reduction in fiscal deficit as a precursor to cut interest rates.

Before the budget, the market had been under bearish pressure. After climbing to 20,103 on Jan. 25, the Sensex had gradually dropped 4.2 percent by Feb. 27 and further by 1.3 percent on budget day. The market was affected more by the negative features of the budget, including the survival of the General Anti-Avoidance Rules and retrospective taxation.

But the market recovered after March 4. Neither the fall, nor the recovery was entirely due to domestic factors. The market had been under the shadow of global factors even before the budget. The recovery was also partly due to an upsurge in world bourses. Dow Jones, for instance, touched 14,354 and crossed its earlier peak in October 2007.

There is a good chance the Sensex will bounce back. The expected cut in the repo rate can be a good trigger though part of it is already built into the recovery so far. If the RBI goes in for a 50 bps cut, the recovery will be strong.

The medium-term trend, however, will depend much on the current account deficit which is showing every sign of bloating. That may slow down FII investment which has also reached a ceiling in many companies. It does seem that the market will take some time to cross its earlier peak.

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