The Market finds its own deficit

Banks lead biggest Budget-day fall.

Banks led the bloodbath in the stock markets today, after the government forecast the highest fiscal deficit in 16 years. As a consequence, the Bombay Stock Exchange Sensitive Index, or Sensex, suffered the biggest fall on a Budget day.

In fact, the indices started falling just 15 minutes into the Budget speech and the southward journey was uninterrupted till the markets closed. The Sensex today slumped 869.65, or 5.8 per cent, to 14,043.40, the most since January 7, and the S&P CNX Nifty Index on the National Stock Exchange also slumped 5.8 per cent to 4,165.7.

Some leading players, however, said the market’s reaction was knee-jerk and things would fall in place after the initial “over-excitement”. Helios Capital chief Sameer Arora said the main problem was the absence of a comprehensive note on the government’s intentions on how it intended to put things back on track.

Besides the fiscal deficit, trading sentiment was also impacted because European stocks dipped to a seven-week low on worries that economic recovery might still be far off.

The rupee and bonds also sank.The rupee weakened 1.2 per cent, the most in almost six weeks, to 48.485 against the dollar, and the yield on the 10-year benchmark paper surged 20 basis points to 7.03 per cent (bond yields move inversely to price).

The spike in bond yields, experts said, could dent treasury income for banks, which are required to hold at least 24 per cent of their deposits in government securities, and profits from bond trading form a substantial part of their revenue. A sharp drop in bond prices will lower the value of bond holdings for banks.

Andrew Holland, CEO, Ambit (Institutional Equities), said the market was unnerved by the fact that higher borrowings would put pressure on interest rates. “The main problem, however, was over-excitement. The market, including the foreign investors, expected the Budget to do something that would showcase India to the rest of the world. That obviously hasn’t happened,” he said.

Anticipation that the government would unleash sweeping market-oriented reforms and infrastructure spending had sent the benchmark index up as much as 94 per cent between mid-March and mid-June.

B Prasanna, MD & CEO, ICICI Securities Primary Dealership, said the biggest disappointment was the Budget’s silence on capital market reforms and a roadmap for bigger disinvestment. Higher borrowing might also exert upward pressure on yields on a week-on-week basis.

The Budget, market players said, also fell short of investor expectations on infrastructure spending and ignored financial sector reform.

There were, however, some positives. The substantial increase in expenditure over the interim Budget spelt good news for domestic consumption and growth, Prasanna said.

Banking sector stocks suffered the most, losing 8.17 per cent to 7,768.63. ICICI Bank, the country’s second largest bank, lost 10 per cent to Rs 679.70, State Bank of India declined 8.6 per cent to Rs 1,653.5 and HDFC Bank dropped 6.1 per cent to Rs 1,423.95.

Among other stocks, Larsen & Toubro lost 8.9 per cent and Reliance Infrastructure sank 12 per cent. Reliance Industries slipped 6.6 per cent to Rs 1,893.15 and Bharat Heavy Electricals retreated 3.9 per cent to Rs 2,100.50..

One of the gainers was ITC, which gained 3.1 per cent to Rs 197.70, after the Budget left tobacco taxes unchanged.