'Expect a market sell-off if FPIs remain unhappy about fiscal deficit'

The Interim Budget appears to be on more or less expected lines. There’s a grant to farmers with holdings of less than 2 hectares. Moreover that is with retrospective effect so, it will be disbursed from this quarter itself, rather than from April onwards. That might mean some resurgence in demand in rural and semi-urban India, with attendant rise in toplines for corporates with rural exposure.

There’s a tax rebate for individuals with up to Rs 500,000 in taxable income. If such an individual uses instruments permissible under Sec 80C of the IT Act, upto Rs 650,000 of income could be subject to rebate. But this will not affect the tax incidence for anybody who earns even one rupee more than the ceiling. This could benefit up to 30 million tax payers, according to first estimates.

Apart from this, there were few changes that would make a substantial difference to the attitudes of stock market investors. Maybe the removal on customs duties for some categories of capital goods will encourage investment, and the extension of tax benefits to notional income from a second self-occupied home will lead to increased demand for housing. On the same lines, real estate developers get an extension on tax liabilities for notional income on unsold properties. That gives them some leeway in terms of time to shift unsold inventory.

So the initial impression for investors was positive, but selective. Two-wheeler companies, tractor makers, and the auto industry in general get a boost on the anticipation of better rural demand.  FMCG stocks get a boost for similar reason. The theme of consumption continues, with some optimists starting to review realtors and housing finance as well. The institutional response, especially the response of the Foreign Portfolio Investors (FPIs) is somewhat likely to be negative because of the fudging on the deficit front. 

The Budget claims that the Fiscal Deficit is being held to the estimated 3.4 per cent of GDP and the “glide path” towards 3 per cent Fiscal Deficit will be maintained. This is highly unlikely. The fiscal deficit estimate for the full-year 2018-19 had been exceeded by November - five months before the fiscal ended.  The running GST estimate, month by month, also makes it likely that tax collections will be well short of the Budget estimates. At the same time, the government will be spending more, including an extra Rs 100 bn on the new PM Kisan scheme. So those numbers will be revised and perhaps, revised drastically with the Fiscal Deficit finally landing considerably above the estimates released by Mr Goyal.

Many investors will absorb the details of this document and wait for the next RBI Monetary Policy Review, which is due next week. If that is also on expected lines, with monetary easing and possibly a rate cut, there could be a significant rally. On the other hand, if the FPIs are seriously unhappy about the fiscal deficit , they may initiate a sell off.  

The rupee fell slightly today. It could lose more ground if there’s FPI selling next week or the MPC delivers a negative surprise. The IT index has been the best performing sector and it could continue to outperform if the rupee does slide some more.  The bounce in Auto and FMCG may also be worth trading.

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Devangshu Datta is an independent market analyst. Views expressed are his own