Union Budget to dictate trend in Equity Markets

As the Finance Minister Arun Jaitley prepares to present the Budget on February 01 post the big bang demonetisation move in November, Indian equity markets have picked up pace on the hopes of a positive budget.

The budget has traditionally been an important part of the financial year, with the government announcing exactly what it wants to do for the next year, and how it has performed last year. Any significant change in these announcements could induce a fear in the equity markets which may have a negative impact on traders and other market participants.

According to data compiled by ETMarkets.com, benchmark equity indices focused on large-cap, mid-cap or even small-cap stocks have always corrected up to 5 per cent every time the Budget countdown begins.

However, this time a ‘hope rally’ has already taken the Nifty index near the 8,500 level from the 7,900 level it quoted in December. The index is facing resistance near the 8,500 level and requires fresh triggers to rally higher. Meanwhile, the 30-share benchmark index has also performed well in January, partially owing to the expectations from the Budget and also due to the diminishing effects of demonetisation.

Though investors fear any populist measures as well as drastic changes in tax structures, an equity investor typically looks for tax sops in the Union Budget. Changes in personal income tax rates remain the most anticipated aspect in the Budget, followed by excise and service tax rates.

A nervous Dalal Street is pinning its hopes on the budget next week as an opportunity for the government to calm investors. According to the analysts, a small change in the long-term capital gains (LTCG) tax structure could drag the domestic equity market down by 5-10 per cent.

The general expectation is that the government will help the revival of the sectors that have succumbed to the demonetisation move. The Finance Minister is also expected to push policies that will help create jobs, affordable housing and infrastructure, besides taking care of the farmers and the agriculture sector. Additionally, there are expectations of a cut in tax rates for individuals and corporates alike. There are possibilities that the basic exemption limit for individuals will be pushed to Rs 5 lakh and the corporate tax rates will be brought down.

While most analyst remain optimistic on the road ahead for the equity markets from a long-term perspective, the markets are expected to be driven by more global events such as policy action by global central banks, policies adopted by the US under the new President and developments in the European Union (EU). Back home, outcome of the assembly elections is key for the overall market direction.

Latin Manharlal Group