ON THE EDGE

It is usually quite difficult to comment on equity markets ahead of a major event. That too, when a lot of uncertainty is hovering around the event. Yes, the major event is the Union Budget and we are writing on the markets ahead of its presentation.

With the Modi-led BJP government presenting its first Budget, markets have high expectations and this was also visible from the traction witnessed in the indices ahead of the Budget. This helped the leading equity indices close at all-time high levels. However, it was the Railway Budget where the government hardly made any major announcement, resulting in a major decline in indices. While the benchmark indices declined, major setback was seen in broader markets as mid-cap and small-cap indices declined more than three per cent. A key takeaway here is that there are lot of expectations from the government and hence the markets have already discounted them into the price.

It is true that the Union Budget is a major event and the reaction to the Railway Budget reinforces the fact. In the last few years the Budget had lost its relevance in terms of affecting the markets as the impact of the Budget was limited only to intra-day movement. Hence, rather than just focusing on the single event, we need to focus on the larger picture. We feel analysing the data from the Economic Survey would be the right way of looking at it.

 The first and the foremost factor to be looked at is the expected GDP growth for FY15. It is GDP growth of a country that provides impetus to other industries. The Economic Survey has pegged the growth for FY15 at 5.4-5.9 percent. This holds the promise that FY15 would be better.

While we are comfortable on the GDP growth rate front, what grabs our attention is the Survey has categorically ruled out rate cuts. The simple reason for this is that the below average monsoon is likely to affect farm production, eventually leading to higher inflation. RBI has always sustained its hawkish stance on the inflation front and hence we also expect that rate cuts would be a distant possibility. However, one positive factor is that both the RBI and the government are working in sync, a scenario unseen during the UPA regime.

Apart from this, rather than just looking at one budget, the government should consider a long term plan to provide solution on various other factors such as fiscal deficit, CAD and subsidy burden. If these issues are addressed on a priority basis, things are likely to fall in place to provide momentum for growth.

While we have missed the Budget analysis to be included in the Market View column, a special report is being carried in this issue. It is expected to provide a much clearer picture on market movement in the near to medium term. As for the long term, we are still confident of market touching new high, as stated in our earlier cover stories.