India Markets Weekahead: Wait for post-budget opportunities

June 29, 2014

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

Markets were fairly volatile last week, reacting to tough measures taken by the Narendra Modi government to get India’s economy back on track amid worries over monsoon rains and the situation in Iraq.
cfcd208495d565ef66e7dff9f98764da.jpgLong-term investors hailed the hike in railway freight and passenger fares as a step in the right direction to bring down indirect subsidies. However, the government rolled back the hikes on suburban fares to a large extent due to political considerations.

Monsoon rains have started on a weak note but if the rains pick up in July and the El Nino effect is tempered, it would have a direct impact on inflation and interest rates.

In Iraq, latest reports suggest government troops have been successful in pushing the insurgents back. The markets in India have got attuned to the new normal, unless there are new developments.

Markets in India, which have run up 25 percent in the last five months, have discounted the promise of better days ahead with smooth implementation of poll promises. Although Prime Minister Modi has warned about “bitter pills”, investors will find it difficult to digest when these pills are administered. Expectations are high and a few more slippages in implementation could raise questions. The budget would be an important event to convert promises into intent, and it needs to be seen how the finance minister would walk a tightrope.

One of the first casualties of the expected budget impact was ITC which fell nearly 5 percent after Health Minister Harsh Vardhan urged the finance minister to increase taxes on cigarettes. Another disappointment for the street was the much awaited gas pricing, which would have had a direct impact on Reliance Industries and ONGC. The government did not bite the bullet and deferred the decision by three months, which resulted in a sharp mid-week correction in the oil and gas sector.

The sugar sector got a booster through increase in import duties to 40 percent. Pharma was the performer for the week with Ranbaxy getting FDA permission to launch generic Diovan in the United States.

The penultimate week of the budget will have a number of domestic data points that could be the driver for the markets. Fiscal deficit figures will be released on Monday followed by a slew of PMI data. Auto numbers would also be announced, which should see the sentimental impact of the new government. The commercial vehicle segment also seems to be reviving with increased enquires at the dealer level. The seven-year replacement cycle should kick off demand in the next few months.

Though investors have been expecting a pre-budget rally, it could be a feeble one at best as most expectations have been built in over the last few months. The lack of immediate tangible benefits could disappoint. The range for the Nifty in the run-up to the budget would be between 7,400 and 7,700. I would suggest holding liquidity for post-budget opportunities.

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