The Friday rally in the domestic stock market, which witnessed the biggest intraday gain ever, seems sustainable as the cut in corporate tax rate announced by Finance Minister Nirmala Sitharaman will give a fillip to earnings of companies besides creating investment demand in the next six months.
"The rally seems more sustainable than the types that fizzle out. The tax cuts will give a boost to corporate earnings. I believe from here on, at least 5 per cent upside is quite evident in the next few months," says Siddharth Sedani, Vice President - Equity Advisory, Anand Rathi Shares and Stock Brokers.
"The downside seems protected as of now, and we should gradually inch up from here," he added.
G Chokkalingam, founder and MD, Equinomics Research and Advisory said there could be some volatility because of global news but this gives good visibility of a steady upside. "The upside will continue."
The government has slashed basic corporate tax rate to 22 per cent from 30 per cent while for new manufacturing companies it has been cut down to 15 per cent from 25 per cent. Sitharaman said the effective corporate tax rate for companies will be 25.2 per cent including all additional levies. The total revenue forgone on account of today's measures would be Rs 1.45 lakh crore per year, she pointed out.
Chokkalingam said announcing the tax cuts is a bold move as it will boost consumption demand as well as investment demand. "The market is reacting positively as the move will boost investment demand from corporates. Indirectly, corporates can save money and use this to expand capacities."
BSE Sensex went up 1921 points to close at 38,014.62 points on Friday. Mirroring BSE, NSE Nifty was also up 5.32 per cent or 570 points and closed at 11,274 points.
Sedani said while manufacturing is at an 11-year low, the cuts will ensure that the next manufacturing cycle, about two years from now, is ready to reap the benefits of the move.
Saurabh Mukherjea, founder, Marcellus Investment Managers, said the relief rally is driven by the people's appreciation of the fact that the government will do whatever it takes to revive the company. "That being said, one should always be cautious on days of high excitement as excitement is never the basis for long term returns."
While it is highly likely that the economy will be in a better shape in the next six months, it would still be best to remain patient. "Patience and rational thought win over excited hot-blooded investment," he cautioned.
Chokkalingam said the freeing up of money for investment will also generate more employment and direct demand. "It shows that the government is going all out to compromise on fiscal deficit and it gives a lot of confidence to market," he added.