Capitalise on the post Budget fall

The market had very high expectations for the Budget. Anticipation was for more help to households and industries, to push the economy.

There were also expectations that incentives for the equity market with benefits in long-term capital gain tax (LTCG) and securities tax transaction (STT) would be announced.

Goodies were expected for households by increasing their personal income through a tax cut and an increase in Income Tax (I-T) exemptions. Sops were expected for industries with special measures for Auto, Real Estate, Infra and Housing.

The market also expected the government to increase its role in the economy by spending more in FY21. The fiscal deficit of FY20 was increased to 3.8 percent only due to the lack of options given fall in the tax revenue. While for FY21 fiscal deficit target of 3.5 percent is below the need of the economy.

Vinod Nair

Head of Research|Geojit Financial Services

• Budget 2020: 'Growth to be key agenda, supportive measures for industries expected'

• A lot has factored in, a short-term stress before Budget 2020

• Budget expectation, earnings growth pushed a solid pre-Budget rally, may be watchful in short term

The Budget has adopted a conservative approach hoping that the economy will grow at a nominal rate of 10 percent (below past 10 years growth average of 12 percent) based on the fiscal and monetary measures already announced in the past six months.

Huge plan of Rs 103 lakh crore infrastructure spending and doubling of farmers income is announced with a lack of fiscal support as required.

The key positive of the Budget is; Government’s wants to reduce its role in businesses and focus on governance. The government expects real GDP to grow in the range of 6-6.5 percent compared to 5 percent estimated in FY20.

Huge divestment plan of Rs 2.1 lakh crore compared to only Rs 0.18 lakh crore till date proves the strong intention of the government. Custom duty increased which is positive for Make in India, and electronics manufacturing.

Very encouraging measures are provided for Infrastructure, Rural market and Aquaculture (Fisheries). Debt borrowing plans have been moderated which is positive for the bond market; interest yield can reduce in the medium to long-term.

Though the Budget may be below the expectation it is not going to affect the long-term trend of the market. Considering Nifty50 as the barometer, the average increase/fall in the last decade, on the budget day is -0.1 percent, +0.3 percent on the next day and +1.5 percent on one-month post-Budget return.

When we look at the total volatility, the range of this positive to negative return is; -2.5 percent to +1.8 on the Budget day, -2.3 percent to +3.5 percent on the next day and -8.0 percent to +10.7 percent on a post-one-month basis.

We also notice that the risk to underperform post the Budget is higher when the pre-Budget rally is very good.

The market made a new high in the month of January 2020 with a broad-based rally across the segments, it is rational to consolidate post Budget as the expectations didn’t fully materialise.

In the past 10 years, Nifty50 has provided a return of 10 percent CAGR. The wealth creation is intact since the main factors required to develop the economy and market already exists in the system, supported by corrective and supportive actions taken by the government and the Reserve Bank of India (RBI).

RBI has announced encouraging measures to spur credit in the economy by supportive measures to stressed sectors. Cut in cash reserve ratio (CRR) to important sectors like retail, automobiles, housing and MSMEs and open market operations of Rs 1 lakh crore are huge positives to flow more credits at lower interest rates.

The commercial banks will not have to provide CRR to RBI for six months between January-July 2020. Also, Banks will not have to consider on-going real estate project which may in a slowdown as non-performing assets (NPAs) for a period of one year.

RBI states that consumer inflation in India has peaked and significant reduction is forecasted in the coming months. RBI recognises that there is a space for more policy actions in the future and maintained an accommodative stance to cut interest rate as and when necessary.

The Author is Head of Research at Geojit Financial Services.