A pragmatic approach or status quo on direct taxes, what worked in favour of the bulls? It's probably a mix of both. Indian equities gave a big thumbs-up to Budget 2021, as indices broke a six-day losing streak and closed with a 5 per cent gain on Budget day, the Sensexs biggest gain since 1999.
All the sectors participated in the rally, except for pharma, which declined 0.6 per cent. "The banking sector witnessed a 'once in a blue moon' kind of movement and sectoral heavyweights took the Nifty Bank index to its all-time high. It posed a gain of 8 per cent," says Ruchit Jain, Senior Analyst, Technical and Derivatives, Angel Broking.
Financial services and realty followed with gains of 7.7 per cent and 6.3 per cent, respectively. Infra, auto, metal stocks gained over 3 per cent each. "Markets felt banks, infra and metals stocks could benefit from the privatisation and spending thrust in the Budget," says Deepak Jasani, Head, Retail Research, HDFC Securities. Tracking positive cues, the volatility index also cooled off nearly 8 per cent to 23.3 during the day.
What Really Helped?
No bad news is actually good news. Concerns of a potential increase in taxation for the super-rich and incremental taxes on capital gains had sent jitters through the market in the last couple of weeks. The index fell almost 7 per cent the week before the Budget day. The Budget assuaged all such apprehensions. "A Budget with no changes in direct taxes will certainly be remembered for years to come. Equities were enthused with no tinkering in capital gains tax, securities transaction tax (STT) or any form of Covid tax," says Krishna Kumar Karwa, MD, Emkay Global Financial Services.
A booster dose of structural reforms and aggressive capex spending aided investor sentiment. Amid a challenging backdrop, a slew of measures were announced to attract foreign flows and promote domestic savings - creation of bad bank, increase in insurance FDI to 74 per cent, enabling debt financing of infrastructure investment trusts (InVITs) and real estate investment trusts (REITs) by foreign portfolio investors (FPIs), a securities market code by 2022, privatisation of two nationalised banks and deduction of tax on dividend income at lower treaty rate for FPIs.
"The announcement on liberalisation of rules around debt financing of REITs and InvITs by FPIs is a welcome move," said Reeba Chacko, Partner and Head, Corporate, Cyril Amarchand Mangaldas, in a note. The proposal to have a single Securities Code by rationalising and consolidating what is currently covered by the SEBI Act, SCRA, Depositories Act and the Government Securities Act is also a great initiative for simplifying the regulatory regime, as well as eliminating overlaps, she added.
Further, the move to raise FDI cap in insurance augurs well for firms struggling to raise capital. "Though there will be no major impact for large players, smaller, unlisted players having solvency ratios closer to 150 per cent (regulatory requirement) can see increased inflows," says Amar Ambani, Senior President and Institutional Research Head at YES Securities.
The Budget provided more to the economy than what the market had anticipated. Going ahead, this will act as a catalyst for the market, in which cyclical sectors such as banks, infrastructure and metals will be the key beneficiaries. "The point of concern is that valuations are at new peaks, which can limit future momentum. Any discrepancy in the global market and domestic debt market is on the watchlist in the medium-term," according to a Geojit Financial Services report.
The deviation in fiscal deficit by Rs 10 lakh crore from the budgeted number also shows the government's commitment towards growth, says Ambani of YES Securities. "We see this as a right approach given the current times. It is also noteworthy to pay attention to the fact that relentless path of fiscal consolidation has not yielded any material change in sovereign ratings." But, chasing growth could have its own repercussions for inflation and bond markets, with yields already hardening because of a wider fiscal shortfall.
"Current low bond yields are a key peg for the market's high valuations; earnings growth is largely factored in forward valuations unless earnings surprise significantly on the upside. Thus, risks to the Indian market could stem from higher-than-expected inflation, which may force the RBI to raise rates well ahead of a full-fledged economic recovery," says Sanjeev Prasad, MD and Co-Head, Kotak Institutional Equities. "Our base-case scenario assumes strong rebound in the economy and earnings in 2022/23, and gradual normalisation of the RBI's current ultra-loose monetary policy, with gradual reduction in liquidity over the next few months and increase in interest rates after the next three-four quarters (from FY23)," he adds.