Dalal Street on the edge

(This story originally appeared in on Feb 01, 2021)

MUMBAI: Investors on Dalal Street are bracing for a volatile week with the Budget on Monday and an RBI policy meet on Friday. Historical data show that most of the leading indices suffered sharp swings on Budget day as investors reacted to the finance minister’s proposals during the speech. And as a quick-reaction to the overall Budget proposals, both the sensex and the Nifty either closed higher or lower for the day.

As it happens ahead of every Budget, this time too market players are keeping their fingers crossed. The FM had said earlier that this fiscal event would be unlike anything that was seen in a century. Traders, however, warned that — given the pandemic-induced economic hardships — the FM has to walk a tightrope, mainly between spending to rejuvenate the economy and reining in high government borrowings.

As for the RBI, at its monetary policy meeting which will conclude on Friday, the central bank is expected to hold key interest rates.

According to Samco Securities senior research analyst Nirali Shah, a bold Budget might rejuvenate the benchmark indices and keep the exuberance going. “If the Budget fails to steer, or beat expectations, then the bruises will deepen as the market is low on liquidity,” Shah said. After scaling a record intraday peak of 50,184 on January 21, the sensex has lost nearly 3,900 points in six straight sessions before ending at 46,286 on Friday. This has put a large number of investors on the back foot. Stretched valuations are also an issue.

“If we look at the larger picture, the market is resting at the top end of its valuation metrics in the short term and the corrective phase is likely to continue either by time or price… this correction might stay for a little longer than what the Street might expect,” Shah said, indicating that the leading indices are at crucial junctures and could go either way after the Budget.

Government borrowing, one of the main determinants for the rate of interest in the economy, could be much lower than the over Rs 13 lakh crore in fiscal 2021 because of higher GST collections, a report by SBI recently said. On Sunday evening, the government said that GST collection for January was a record Rs 1.20 lakh crore. This might bolster the government’s cash balance, which could be used either to finance a part of the fiscal deficit or to spend and pay back all dues of FY21, the report said.

From the stock market’s point of view, brokers and investors are expecting the FM to lower or abolish long-term capital gains tax on equities & equity mutual funds, allow indexation benefits for equity MFs, reduce dividend distribution tax and allow fund houses to launch debt-linked savings schemes on the lines of equity-linked savings schemes, investments in which are tax deductible under section 80c of Income Tax Act.