Positive vibes from interim budget and RBI policy…

Post the interim budget, market is attempting to stretch its gains and move to a new level. Nifty50 has crossed beyond 11,000 for the first time in the last three months, during which 10,600 to 10,980 was a stiff resistance. The two key reasons for this positive trend are interim budget which was better than expected and vibes over a change in RBI policy. Even though the main indices like Nifty50 are positive the broad market continues to impact negatively the wealth of small investors, mid and small cap indices are down by 5 to 6 percent on a MoM basis. Since the budget, Nifty50 is up by 3.9% in which the best performers are IT (5%), auto (5%), consumer durables (4%) and banks (2%). This performance is skewed to few domestic companies focused on consumption oriented sectors like FMCG, consumer stable, and discretionary and private banks. IT stocks are doing well due to the cautious nature of the market given downgrade in earnings as economy is slowing down while sector outlook has improved and INR is depreciating. Recently, bargaining opportunity also emerged on interest sensitive stocks like auto and finance with a dovish expectation on RBIs policy, hoping for a change in stance from ‘Calibrated Tightening’ to ‘Neutral’.

The interim budget was watched on three important points – what will be the sops for small farmers and how big will it be, incentive to the common man and whether it would be fiscally prudent. The outcome has been marginally better than expected by the market since it provided a good package considering the upcoming general election and maintained its long-term rationality. Providing a good signal that event risk is over and will not trouble the economic accountancy and populist agenda in the long-term. Agriculture, rural economy and increase in disposable income were the themes of the budget. Real estate can also benefit given sensible tax measures for individuals and corporates.

On the fiscal front, FY19 deficit was marginally up to 3.4% from 3.3% targeted earlier. This is marginally better than anticipated by the market which was mentally prepared for 3.5%. The forecast for FY20 has been increased to 3.4% from the earlier target of 3.2%, which is marginally higher than expected but it includes the cost of small farmer schemes, higher petroleum subsidy and tax reductions.

Market’s expectation from RBI has been increasing since the change in Governor. The current stance of RBI policy does not support for a cut in interest rate, though there are no rigid norms, market does not expect the same. RBI may hold their decision to not make it premature, look at updated data, inflationary nature of the interim budget and outcome of general election. This time the stance is expected to be accommodated to ‘Neutral’ while interest rates will be cut in the near future. On the back of lower oil prices, slower consumer and corporate demand, and slowdown in the global economy, there are ample chances that RBI will cut in the future. Market expects two rate cuts, each of 25 bps, in 2019-20.

Posted on: February 7, 2019