Budget 2016: Hopes of market bounceback fizzle out

March 1, 2016

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

The wild gyrations in the stock market on Budget day were due to initial disapproval over inadequate measures taken to recapitalise banks and the seemingly unfair corporate tax treatment for large firms that form the bulk of market capitalisation.

Market investors later breathed a sigh of relief when the possible reintroduction of the long-term capital gains tax did not find mention in Finance Minister Arun Jaitley’s budget speech. Budget 2016 was not a budget for the market; it was one for rural India. To be fair, it wasn’t regressive for the markets either.

Expectations of a favourable change in income tax slabs were belied. Instead, additional surcharges were introduced. The cornerstone of Budget 2016 was an enhanced focus on rural India, agriculture and social sector spending ahead of key state elections. Overall, it needs to be seen in the light of the current macroeconomic situation.

A man counts his currency after buying food from a street side restaurant in New DelhiI feel the finance minister could have done a bit more for stock markets as sentiment affects the capital-raising capability of a capital-hungry country like India. It would have helped divestment in public sector undertakings at better valuations, helped raise funds for existing and new ventures, and spread the feel-good factor leading to higher expenditure and consumption.

This coupled with the rural boost would have improved the manufacturing economy overall and started a new cycle much faster. Jaitley could have done this by reducing corporate tax in tandem with the end of tax exemptions. A two percent reduction would have been revenue neutral due to the removal of exemptions, but would have helped improve sentiment immensely.

In key events this week, auto companies are in focus as they unveil sales figures for February. Airline stocks will also be watched as jet fuel prices will be raised after the budget. Market Economics unveiled Nikkei India Manufacturing PMI on Tuesday, with manufacturing activity expanding for a second consecutive month in February. Service sector PMI for February is due on Thursday.

On the global front, it’s February manufacturing PMI data for China, Japan, euro zone and the United States among others on Tuesday, indicating the health of manufacturing activity. Services PMI data for the same will be available on Thursday.

With the budget over and no near-term domestic triggers, Indian markets may languish again with hopes of a bounce back fizzling out. The only positive sign of Monday’s movement is the double bottom formed around 6,850-6,900 levels and the Nifty should not breach that range easily.

There would be pressure on the Reserve Bank of India to cut rates and it would be interesting to see how the central bank reacts. This will be the only trigger in the immediate future that could take the Nifty beyond 7,250 levels.

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