Will the stock markets' relief rally last?

The initial reaction to the Budget was violent. The Nifty crashed to a new 21-month low of 6,825 while the Finance Minister was speaking. Then it bounced back quite sharply. However, after spending a brief while in the green, it slid into losing territory again. As always, the Budget Day saw high participation and strong volumes.

The movement is consistent with the bearish major trend remaining in force. The new low indicates that quite clearly. However, there could be a relief rally since expectations were muted and there was selling going into the Budget.


Relief rallies in bear markets can be quite sharp. The key support zone is 6,825-6,875, while the key zone of resistance would be 7,200-7,250. Breakouts beyond these zones could trigger an immediate move of up to 3-5 per cent - that is, till around 6,500 or 7,500, depending on the direction.

The broader market trend also indicates that the overall reception to the Budget was somewhat bearish. Declines outnumbered advances, which is usually indicative of retail selling - not surprising given the impact of the new impost of dividend tax.

It may be useful to take a look at some key sector for the Budget day movements.

The Nifty Automobiles index was down. This was probably a direct consequence of the cesses and luxury tax being imposed on the sector. Cars will become more expensive. Balancing that, it is possible that EMIs will reduce if interest rates do come down. Also, rural demand should rise, with a positive impact on two-wheelers, trucks and tractors.

The Nifty Bank index bounced sharply. It saw a very steep fall till a new 21-month low of 13,407, followed by a swing all the way till 14,222 and it finally settled at 13,946, up by a little over 1 per cent day-on-day. This is consistent with the Bank Nifty's behaviour, which is usually high-beta. But it outperformed the Nifty in that the response seemed to be more positive.

The positive perception seemed to be driven by the bond market rally. The government of India has committed to maintain the Fiscal Deficit at 3.5 per cent of GDP, which will mean lower treasury issuances. Hence, there's less pressure on bond markets, which can finance other, higher-yield issues. That led to a bond market rally which means that portfolios of banks saw capital gains.

However, the Nifty Bank remains in a long-term bear market in technical terms, given the pattern of lower lows. Other financials also saw gains. Given the emphasis on infrastructure bonds, there should be a fair amount of business being generated in the bond market, and the market is responding to the anticipation of higher volumes. The statement that insurers would be listed is intriguing - let's see where this goes.

There were positive reactions in the FMCG sector, in healthcare and pharma, and in steel. The drivers were probably the perception that the Budget is rural-friendly and of course, there is a focus on infrastructure. Pharma and healthcare should benefit if the plans for 3,000 stores selling generics, and the new health insurance scheme, both get going. However, despite the apparent support to realty from several directions, there was no big rally in real estate stocks. Among other key areas, the IT Index took a hammering, for no particular reason.

Net-net, the long-term trend still seems to be down. But the Budget seems to have sparked a relief rally. The initial market response has been fairly positive. We would need to see first, a breakout beyond Nifty 7,250 and then, a movement till the 7,500-range to consider the possibility of a long trend reversal.