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Union Budget: Market Gives A Thumbs Down

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The Indian equity market gave a thumbs down to the Union Budget on Friday with the Bombay Stock Exchange 30-share Sensitive Index (Sensex) losing 210 points to end the day at 17,466.20 With today's fall, the Sensex in the last 13 years since 2000 has fallen 9 out of the 15 times on the day of the budget. The good news is despite today's fall, the Sensex for 2012 is still up 13 per cent.
"It's nothing positive or negative," was what Anand Tandon, group CEO at JRG, a south India-based financial services firm, had to say about the budget. The reason he feels why the Sensex has tanked is because it will see inflation rising and put further pressure on corporate earnings due to the rise in service tax (services sector accounts for 59 per cent of India's GDP).

Similarly, concerns over rising inflation saw 10-year government securities (G-Sec) yield rising by 7 basis points to 8.43 per cent at 4 pm compared to yesterday's close of 8.36 per cent. In the last 15 days, the G-Sec yields have risen from 8.20 per cent to 8.43 per cent. "Foreign banks and private sector banks have been selling G-Sec and sitting on cash on expectation of further rise in yields due to excessive market borrowing from the government," said a local bond dealer. 

Though the equity market lost ground, it started on a positive note with the Sensex trading higher at 17,750, up 75 points at 11 in the morning when the finance minister started delivering his Union Budget. Within 30 minutes, the Sensex was up nearly 186 points at 17,861 after the minister announced plans to raise Rs 30,000 crore from disinvestment of state-run companies and allowing two-way fungibility in Indian depository receipts. This witnessed the Standard Chartered Plc IDR hitting a 20 per cent upper circuit. The stock ended at the upper circuit at Rs 94.20 with an outstanding buy order of 2.45 lakh shares on the BSE.

The Sensex was also up with the finance minister proposing Rajiv Gandhi Equity Scheme helping to revive the retail investor interest in the equity markets. Says K. Sandeep Nayak, CEO at Centrum Broking, "More retail investors coming into the market to avail the tax benefit of Rs 50,000 for investment into stocks augurs well for the long-term health of the broking industry. This coupled with the reduction in securities transaction tax (STT) by 20 per cent on investment transactions is very positive for capital market intermediaries."

The breaks given to the infrastructure sector and companies were also welcomed by the market. However, a rise in excise duties and services taxes pulled the Sensex from its intra-day high of 17,871 to touch an intra-day low of 17,426.58, down 2.5 per cent before closing the day at 17,466.20. Says Sandeep Singal, co-head institutional equities at Emkay Global, "The rise in cess for oil upstream companies and no specific provision made for capital goods sector pulled down companies like ONGC, Cairn India, L&T and Bhel which was largely responsible for the fall in Sensex." Cess on crude petroleum oil produced has been revised to Rs 4,500 per metric tonne from the current Rs 2,500.

With no major positive trigger from the budget and on the backdrop of 13 per cent rise in the Sensex since the start of the year, what's in stored for the Indian equity market? "With the foreign inflow continuing, the market may still go up. Marketmen will forget today's event and life go on as usual starting Monday," says Tandon who feels that the big bet on interest rate cut will take now take a breather before we see the central bank cutting rates.

Though Tandon feels that on basis of valuation, Indian equity is still fairly valued with the Sensex trading at 14 times forward earning and with liquidity continuing, the Sensex can rally another 15 per cent from the current levels. But beyond that, it looks difficult unless or until there are some positive structural change in the market.

Agreeing with him, Singal of Emkay says, "With most of the negatives like concerns over Iran, rising oil prices and bailout in the Euro-zone already being discounted by the market, there isn't anything in the near future that could drive the market up or down. The Indian market will remain rangebound with the Sensex moving in a band of 1000 points between 17,000 and 18,000."