The sustained post-Budget selling by Foreign Portfolio Investors (FPI), coupled with bad news on the consumption front has led to the finance minister announcing a combination of roll-backs of Budget provisions and new sops to try and reverse sentiment and encourage consumption.
The provision for higher tax surcharge on super-rich individuals and trusts is being removed. This should help reverse some of the pessimism as it affected many FIIs. In addition, the government has announced a few measures to try and encourage loan disbursal from banks and NBFCs, including HFCs, while trying to ensure lower cost of capital for borrowers.
The FM also promised to accelerate the processes for GST refunds. There were some specific measures to try and boost activity in the automobile sector as well. She reiterated the toning down of the notorious Angel Tax.
To a certain extent, all this should lead to a turnaround on sentiment and it may have come just in time to boost consumption patterns in the festive season. However, it’s clear that at least some of the selling has been driven by a combination of deteriorating macroeconomic considerations and poor corporate results.
The fiscal deficit is high and likely to remain so, with the IMF pointing out that Budget projections of tax collections in 2020-21 are unrealistic and unlikely to be met. It also appears unlikely that the government will actually undertake sovereign borrowings abroad, which means that the burden of funding higher government borrowing will fall upon the domestic bond market. This will crowd out private investment and as a result, GDP growth projections may see further downgrades.
Corporate results have been poor for the last two quarters with a spate of downgrades of earnings projections. High speed indicators from the current quarter indicate that the downturn may have gotten worse. Automobile sales are declining and that is affecting employment and revenues across the many sectors connected to the auto-industry value chain. The accelerated depreciation of vehicles along with hope of lower EMIs and possibly, some buying by government departments, might help to boost interest here.
Net-net though, we are back to the pre-Budget situation on the tax front, along with the promise of faster GST processing of refunds, and cheaper loans. It remains to be seen if lower EMIs will boost consumption in general. Where corporates are concerned, investment plans are thin on the ground, with most sectors operating below capacity.
In the auto sector, we will have to track September sales to gauge if there’s a revival in demand. Since most shares in the sector are trading near their 52-week lows, there may well be some speculative buying in the next few sessions.
Since the market trend is heavily influenced by FII attitudes, any change for the better in FPIs' stance, might also help the markets recover. As of now, however, the major indices are all trading below their respective 200-Day Moving Averages (DMA). This is a reliable sign of a bearish long-term trend. The Nifty, for example, is at 10830 with the 200 DMA in the zone of 11200. The price would have to recover to beyond that level, say till around 11300, to indicate a sustainable turnaround.
The author is an independent market analyst. Views expressed are his own