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Markets unlikely to see any pre-interim Budget rally

By Puneet Wadhwa & Deepak Korgaonkar
January 25, 2019 15:38 IST
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The government is expected to dole out some populist policies, especially for the rural / farm sector while presenting the interim budget, given that the country is heading towards general elections over the next few months.

Illustration: Uttam Ghosh/

Analysts have ruled out significant changes to corporate tax and personal income tax rates and a runaway pre-interim budget market rally.

On the other hand, they expect the government to dole out some populist policies, especially for the rural / farm sector while presenting the interim budget scheduled for February 01, given that the country is heading towards general elections over the next few months.


“Because of its drubbing in recent state elections and concerns about farm distress, broad expectations are for the government to present a populist budget, announce a farm package and miss its fiscal deficit targets.

"Even with a farm package, we don’t expect the government to budget a deficit of 3.3 per cent of GDP (gross domestic product) or higher, as that would signal a pause or a deviation from fiscal consolidation,” wrote Sonal Varma, managing director and chief India economist at Nomura, in a co-authored report with Aurodeep Nandi.

Outside of the farm sector, Nomura expects a focus on micro, small and medium enterprises (MSMEs) and the middle class and rules out any big tax changes in the interim budget.

They, however, suggest major changes to the existing tax structure, if any, will be announced in the final budget to be presented in June/July 2019.

Analysts at Motilal Oswal Institutional Research, too, feel that there is little scope for the government to significantly lower direct and indirect tax rates.

“As corporate tax rate has not been reduced on the largest 1 per cent companies that account for a majority of corporate tax collection, we believe the government is unlikely to cut the effective tax rate from around 26.5 per cent to 25 per cent. Further, personal income taxes have been one of the bright spots from the tax collection perspective.

"The Centre is unlikely to provide significant relief to these two classes, although some changes cannot be ruled out,” says a pre-budget note from the brokerage.

Investing strategy

Historically, the markets have done well a fortnight ahead of the presentation of the budget with the S&P BSE Sensex and Nifty50 gaining in the range of 1 per cent to 4 per cent in the past four out of five years, as per compiled by Business Standard Research Bureau.

In 2018, the S&P BSE Sensex had gained 4.07 per cent in the 15 days prior to the presentation of the Budget, making it the best fortnightly run in 12 years.

“I don’t think there will be a pre-interim budget or post-budget rally this year as there is a lot of uncertainty regarding the outcome of general elections scheduled later this year.

"The interim budget, at best, will be a balancing act between the revenues and the planned expenditure,” says G Chokkalingam, founder and managing director, Equinomics Research.

In a recent report, Somshankar Sinha, managing director and head of India equity research, too, ruled out a significant upside for the equity markets.

“With valuations expensive, the macro soft and political outcomes uncertain, we see few triggers India's equity markets this year.

"Axis Bank and ICICI Bank are among our top-10 ideas, as are Infosys, ITC, NTPC and Sun Pharma; while we would avoid Reliance Industries, Hindustan Unilever (HUL), Hero MotoCorp, Lupin and Wipro in the large-cap universe,” he wrote in a recent co-authored report with Piyush Nahar and Pratik Chaudhuri.

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Puneet Wadhwa & Deepak Korgaonkar in New Delhi / Mumbai
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