State/General elections, Indo-China/Indo-Pak war fear, RBI policy, erstwhile US President Trump’s tweets, rising COVID cases, and quarterly results announcements.
All the above events have one thing in common! All of them induce volatility in Indian markets (markets in general).
Punters never leave a stone unturned to benefit from volatility. Most of these occurrences are temporary, and gradually turn out to be non-events. The market keeps traversing its own path within a span of time.
We witnessed one such event in the week gone by The Union Budget of 2021.
While most of the people look at the union budget mainly from a perspective of taxation, there were notable reforms announced in the budget. The increased allocation to healthcare expenditure is welcome, considering the state of our healthcare infrastructure at the peak of the pandemic. The pandemic has indeed played its role in motivating our Government to undertake the much-needed revamp of our healthcare infrastructure.
The incumbent Government’s prudence to contain fiscal deficit since 2014 is commendable.
COVID is surely a spoilsport and has taken the fiscal deficit number to 9.5%. While the markets are cheering the overall budget, is the fiscal deficit getting its due attention? Liquidity usually masks the concerns around the fiscal deficit.
The reality only dawns upon once liquidity shrinks.
The estimated fiscal deficit for FY’22 is 6.8%. A simple question to ask is: from where will the Government borrow to fulfil the deficit? Of course, it will borrow from the open markets. Government’s ambitious borrowing targets are likely to lead to ‘crowding out’ in the lending-borrowing market.
This happens when the Government borrows surplus liquidity from the market, leaving little for private players.
Lack of capital increases the cost of funding for corporations and it affects their investment plans.
The Government’s commitment to cleanliness, clean water, and self-reliance in manufacturing was evident in the presented budget. The allocation has been increased to all the 3 areas.
The power distribution sector got its due attention. Infrastructure has been a key focus area for the Government. It continues to remain so.
This budget saw a record outlay for the Ministry of Road Transport and Highways- 1.18 lac crores.
Movement of Sensex During the Union Budget Week
The finance minister announced big bang projects in the 3 poll-bound states- Tamil Nadu, West Bengal and Kerala. Is that really a politically motivated allocation? Well, the smile on our FM’s face while reading out this allocation was difficult to ignore!
The market, in general, is happy with the reforms announced in the financial sector. The proposed establishment of ARC and AMC structure for taking over stressed assets was welcomed with open arms (yes, I am talking about the movement in Bank Nifty).
On a lighter note, the mighty State Bank of India will get some relief after this announcement. It will have a buddy when it comes to acquiring bad assets. And yes, it is well reflected in its trending price chart!
Finally, the budget analysis is incomplete without talking about one thing: Income taxes for the middle class.
The middle class has embraced the budget with love. There was a broad-based expectation of an increase in taxation to make good the shortfall in Government’s revenues due to COVID.
That fear hasn’t come true.
Let me conclude by briefly talking about the RBI policy. The Repo rate has been maintained at 4% and the stance continues to remain accommodative. Considering the high fiscal deficit, is it just a matter of time before the RBI changes its dovish stance? Let’s wait and watch!
Until then, have a good week ahead.
Data to look for in the coming week
|01-Feb||Inflation Rate YoY||4.59%||4%|