Budget seems to be a non-event for the market

Lokeshwarri S.K.

BL Research Bureau

Probably in deference to its experience during the July Budget session, the stock market went in to the Budget day of 2010 on an extremely subdued note.

There was a widespread belief that the Government could roll-back the stimulus given to fight the economic recession in this Budget. The Sensex was 8 per cent below the peak of 17790 recorded in January on the morning of the Budget day, reflecting this mood of caution.

The Budget can be termed neutral for the market with positives such as a clear trajectory for fiscal deficit, reduced market borrowing, boost to consumption by increasing rural spends being balanced by the negative impact of measures such as hike in minimum alternate tax and excise duty hikes.

That the Budget is a non-event and would scarcely have an impact on the trend in the market is borne by the fact that Sensex and Nifty closed barely 1 per cent higher after rising about 2.5 per cent during the session.

Most market participants had been worried about the soaring fiscal deficit and were looking for a clear cut plan from the Finance Minister to reduce this figure and get back on the path of fiscal prudence.

Market rejoiced and the Sensex came out of its comatose state to spurt higher once the Finance Minister announced the fiscal deficit of 5.5 per cent, 4.8 per cent and 4.1 per cent for 2010-11, 2011-12 and 2012-13, respectively.

The icing on the cake was the giveaways announced on the personal income-tax front. This move is viewed as positive as it can impart liquidity to the bourses. But investors need to take note of the large disinvestment programme scheduled over the ensuing months for Rs 25,000 crore. This programme can drain liquidity in secondary market and impact the performance of other IPOs.

Corporate profitability

The Budget has various implications for corporate bottom lines, both positive and negative, and stock prices would take cognizance of these. Increase in minimum alternate tax and hike in excise duty would directly reduce the bottom line of companies.

While hike in excise duty could marginally impact demand, if manufacturers decide to take concerted price increases, the outlays planned for rural development and NREGA will give a boost to consumption that is important for keeping the economy growing at a brisk pace.

Another benefit to corporate India is the reduced net government borrowing at Rs 3.45 lakh crore, 20 per cent lower than the last fiscal. Banks could now plough back higher proportion of deposits to commercial sector making credit more easily available to companies.

From a technical standpoint, the Sensex has been in a medium-term downtrend since the January peak of 17760. A pull-back rally was developing since February 8 that halted at 16669 on the Budget day.

As the index has not even retraced half of the fall since January, the medium-term trend in the index continues to be down with the possibility of the down-move continuing in the days ahead. A close above 17,000 is needed to negate the bearish medium-term view for this index.