Union Budget 2018

What are the key expectations of capital markets

There has been a close relationship between capital markets and the Union Budget. The market normally tends to react sharply to key announcemens in the Union Budget. There are 4 key areas where the capital markets are expecting some major announcements.

Big push for economy

There is a direct multiplier effect of economic growth on the equity markets. Most bull markets have coincided with high levels of economic growth. The markets are expecting a big push to infrastructure spending and growth even at the cost of a slightly flexible fiscal deficit target. The markets are looking at a major effort from the government in the areas of pushing manufacturing sector and helping in revival of the capital investment cycle. Infrastructure spend will be the key!

Incentives for equities

The budget is expected to provide a big boost to the equity markets. There could be incentives for retail investors to invest in equities via more tax breaks. We could see infra equity stocks being included under Section 80C. ELSS may get a higher limit carved out. Section 54EC benefits for saving capital gains tax could be extended to equity and mutual funds. Of course, the markets will also be hoping that the government does not tinker with LTCG as it could dampen sentiments.

Greater institutional focus

Foreign portfolio investors (FPIs) have been the lifeblood of the Indian equity markets for a long time. It is only in the last 2 years that domestic mutual funds have emerged as veritable players in terms of flows. FPIs continue to have an over sized impact as they impact the markets and the INR. It is expected that the process to on-board FPIs could be simplified. The budget is also expected to throw greater light on the P-notes front as most P-note issuers have found it difficult after the new cost regime. Above all, the budget is also expected to find a quick resolution to pending cases like Cairn, Vodafone and Nokia to boost the sentiments of the markets.

Special focus on commodities

In fact, this budget could see a much bigger focus on the commodity markets. Commodity markets in India are still under too many restrictions and are not able to expand in a big way like equities. One way would be to facilitate greater institutional participation in these commodity markets from domestic mutual funds and FPIs. We could see a lot of clarity in the budget. The budget could also focus on aligning the equity markets and the commodity markets closer. Another area could be opening up the gates for introduction of new and innovative products. This budget could actually be an exciting document for commodity markets! ©

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