With the Budget around the corner, the Sensex may just cross the 21,000-plus highs achieved in January 2008 and November 2010. This is partly because the Finance Minister is keen to be seen as market-
friendly, and expectations are building the market around that. After two years, the Bombay Stock Exchange Sensex closed above the 20,000 level on 18 January 2013, and P Chidambaram has gone out of his way to lure foreign institutional investors by deferring GAAR and ensuring that the RBI obliges with a rate cut. The deferral of GAAR till April 2016 provides enough time to FIIs to review their portfolios, while a rate cut is likely to improve liquidity and investment in the economy. Also, a falling interest rate regime is good for stocks. The UPA has also allowed state fuel retailers to raise prices to gradually align them with market rates and help cut its fuel subsidy bill, a move which sent both oil stocks and markets soaring way past the 20,000 level.
In his attempt to flood Indian markets with hot money, he has signalled to foreign investors that the budget will be “responsible”, which means it will attempt to regain fiscal balance and no spend too much on election freebies. The bulls cannot ask for more.
The problem for bulls in the current market is that all the good news has already been discounted. From interest rates to a good budget, the Sensex is doing the high-wire act because the markets have
already assumed good things from P Chidambaram, whether it is in terms of the fiscal deficit or reforms or rate cuts. In short, the best is already over.
But as the RBI’s recent monetary policy shows, the real challenges lie ahead. The current account deficit is likely to get worse in the third quarter, and if the fourth quarter does not show significant improvement, the RBI will again have to be cautious on rate cuts. Since the government has to raise revenues for election-year giveaways, this means either indirect or direct taxes have to be raised. Either way, the budget will bring some kind of bad news for the corporate sector. In the alternative, if Chidambaram shows funny numbers of a lower fiscal deficit without actually increasing taxes or cutting expenses – as his predecessor did – the markets will see through his jugglery and push the indices down.
The pre-budget bounce is thus a good time to lock into stock gains. After the budget, all bets are off.