Union Budget

Why are the equity markets so thoroughly impressed?

On the day the Union Budget was announced, the Nifty touched a low of 6850. Interestingly, in the next 4 days, the Nifty bounced back nearly 650 points to close within kissing distance of the 7500 mark. This post-budget market rally is, perhaps, the best rally that we have seen in the last 10 years. In a budget that has been described as pro-rural and anti-rich, what has enthused the equity markets so much?

It is all about banking cheer…

The budget was announced in the backdrop of a fairly weak PSU banking scenario. NPAs were nearly $60 billion and capital was stretched. There were 3 key things in this budget for banks. Firstly, the fiscal discipline is good news for the bond portfolios of banks. Secondly, by keeping the absolute allocation for bank recapitalization at a low level of Rs.25,000 crore, the government has adopted a case-by-case approach. Only the deserving banks will get extra capital support and that is likely to separate the men from the boys. Thirdly, the idea of revaluation reserve and currency translation reserve as part of Tier I capital is in tune with the practice that other countries follow. In one shot, it almost puts the PSU banks at par with the other private banks, although challenges of autonomy remain. This big boost to the banking sector was the first big leg-up for the equity markets. Markets are interpreting it as a sign of shift in banking.

Rural and infrastructure push…

Both these initiatives may sound quite trite to begin with. But the multiplier effect of both these initiatives cannot be underestimated. For example, quality infrastructure has an impact of 1.35 on GDP. A Rupee 1 investment in infrastructure creates GDP to the tune of 1.35. Also the overall GDP growth is likely to be impacted by nearly 2% per annum. Rural households have a much higher propensity to consume and hence higher rural incomes will result in greater velocity of money circulation and greater demand for a wide array of goods and services. What better way to give a demand-push to the economy?

FII interests have been held…

One can argue that the budget did not scrap GAAR but only reiterated its implementation from April 2017. But, greater compliance has never been the issue; greater uncertainty and unpredictability have been. To that extent giving FIIs comfort on the issue of retrospective taxation is a step in the right direction. The Finance Minister’s assurance that there will be no tax hounding of FIIs, in itself, is a major step forward. But above all, the focus on fiscal discipline means that rating agencies are impressed and FIIs will be more inclined towards risk-on in India. No doubt, FIIs have turned net buyers in March. The rally may have just begun and may have further legs to go! ©

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