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Fiscal prudence tops market players' Budget wish list

Analysts rule out pre-Budget rally as global markets are likely to dictate trend

Puneet Wadhwa  |  New Delhi 

Arun Jaitley, Jayant Sinha
Union Finance Minister Arun Jaitley with MoS Jayant Sinha at the Quarterly Review Meeting of the Chairman and Managing Directors of Public Sector Banks (PSBs) and Financial Institutions (FIs) at RBI Building in New Delhi. Photo: PTI

The Narendra Modi–led government is gearing up to present the Union Budget for 2016-17 on February 29 at a time when the global financial have been rattled with developments in China amid a sharp fall in crude oil prices and global economic slowdown.

In its sixth bi-monthly Monetary Policy review, the Reserve Bank of India (RBI) has put the onus of maintaining fiscal prudence on the government, which will unveiling its policies in the Budget.

  • Maintain fiscal discipline
  • Focus on rural segment, thereby reviving the rural economy
  • The need to remain on the path of public expenditure
  • Structural reforms should continue; await bankruptcy law
  • Gains from fall in oil prices should be used judiciously; more subsidies will be a dampener

So, what does the Budget have in store and what do the expect from the finance minister? Also, will there be a pre-Budget rally this time around?

Also Read: Rajan puts the ball in Jaitley's court

Analysts say the are looking forward to the Budget because now it’s the finance minister’s turn to give confidence to global investors by way of structural reforms and find a way to achieve the fiscal deficit target of 3.5 per cent in FY17. This will also open the doors for RBI to remain accommodative for interest rates going ahead.
Read our full coverage on Union Budget 2016 Vaibhav Sanghavi, managing director at Ambit Investment Advisors, says: “The markets are expecting that the Budget will focus on the rural segment, thereby reviving the rural economy. The government also needs to be on the path of public expenditure and be fiscally prudent. As regards structural reforms, the markets are eagerly looking forward to the Bankruptcy Law.”


Fiscal prudence tops market players' Budget wish list

Also Read: RBI, FinMin on same page on fiscal prudence

Adds U R Bhat, managing director, Dalton Capital Advisors: “India has benefited from the fall in international crude oil prices. The markets will definitely like to know how the government intends to use that money in terms of accelerating the growth potential of the economy. This is one thing that will be very keenly watched. If they end up giving more subsidies, it will be a big disappointment for the markets.”

Pre-Budget rally

In the past decade, only on two occasions did the BSE S&P Sensex recorded a gain during the one-month period before the Union Budget presentation.

While most analysts remain optimistic on the road ahead for the equity markets from a long-term perspective, they expect the markets to be driven by global events rather than events back home.

Also Read: Budget to serve the cause of economics, not populism: FM

“A pre-Budget rally appears unlikely as we do not expect de-coupling of Indian equities from global markets. The best case scenario for Indian equities is an environment of stability (reflecting diminishing tail risks) in which India will outperform as relative fundamentals remain attractive,” says Ravi Sundar Muthukrishnan, senior vice-president and co-head of research at ICICI Securities.

Also Read: FM should let deficit slip, says Reuters poll

Bhat of Dalton expects the Nifty50 to remain between 7,250 and 7,850 over the next two months. He does not see the index crossing the 8,000-mark in a hurry and sees an immediate support at 7,100 levels.

Also Read: There is a lot of value in emerging markets: Jan Dehn

However, A K Prabhakar, head of research at IDBI Capital, has a more bearish view and expects the Nifty to breach this support of 7,100 on the downside going ahead.

“Usually, investors expect the markets to witness a pre-Budget rally. However, this time around, things are turning towards the negative and believe that given the focus on the rural economy, the government may not adhere to the fiscal deficit targets. That apart, the December quarter results season has also not been supportive. I expect the market to correct till 7,100 (Nifty) before it stages any recovery. Over the next few months, it is quite possible that the Nifty drops to 6,600-6,800 levels,” he says.


  Senex return in %*
Year Before After
Feb 2005 4.59 -3.03
Feb 2006 5.06 6.90
Feb 2007 -8.96 -0.42
Feb 2008 -3.16 -6.87
Feb 2009 -0.19 -3.89
July 2009 -7.02 10.47
Feb 2010 -2.09 7.40
Feb 2011 -3.11 6.28
Mar 2012 -3.79 -1.80
Feb 2013 -6.18 -0.14
Feb 2014 -2.85 6.69
July 2014 -0.82 -0.17
Feb 2015 -0.67 -4.72
*% returns one month before and after Union Budget
Data compiled by Business Standard Research


First Published: Wed, February 03 2016. 22:48 IST