Two sides of Budget 2020: What will drive the market?

There is a famous saying that hope is the biggest deceiver, and that is what has been fuelling the Indian financial market for now. The Budget reflected the government’s intent to revive the economy, but however there was a lack of actionable measure. The focus was on generation of employment and inclusive growth through increased expenditure on the rural economy, infrastructure, MSME and healthcare. Abolition of DDT, tax relief to the middle class and lower middle class segments along with simplification of the tax regime all pointed that government this time is growth-centric to revive the economy by boosting spending.

But will this actually leave any disposable income in the hands of people? The proposal to cut personal tax rates, but remove various exemptions such as those for home loans, insurance, and investments in equity-linked savings schemes, puzzled investors as they tried to figure how it would raise disposable incomes. The revision in tax structure may be non-fulfilling as taxpayers may be less fortunate under the new slabs if exemptions and deductions are removed.

However, given the absence of steps to address near-term issues of lukewarm demand and weak liquidity with mid and small-sized companies, a revival in corporate earnings may be questionable for the next few months. In this backdrop of tepid demand and low visibility of a recovery in corporate earnings, investors might not want to take long bets on equities in the near term and hence we saw a sharp decline in the stocks on the budget day.

On the other side of the story, the Budget may have triggered one of the deepest declines in the Indian stock market but it has not done any damage to the bond market. Indian bond markets could be seen as attractive to foreign investors as the deficit was well managed at 3.5 percent by the government. Also, the limit for FPI in corporate bonds will be increased to 15 percent from the current 9 percent which would further attract more bond investments. Restraining the fiscal gap and allowing offshore purchases of some categories of sovereign bonds shall likely draw more global investors and this can lead to decline bond yields in the short run and the rupee may limit its weakness against the dollar.

The impact of budget seemed limited on rupee as the losses which might be caused on the equity front shall be subsided by the gains and investments in the bond market. Low oil prices and rally in the global bond market can lead to money flow into Indian bonds too. Other than that, the government is planning divestments of Air India and LIC which when triggered shall bring in inflows in the market. Along with this, the second tranche of Bharat Bond ETF is likely to hit the market in the current quarter thereby bringing in more dollars to the economy.

Since rupee is majorly influenced by the capital flow, if outflow from equity gets offset by the inflow into bonds, the rupee is unlikely to break 72.20-72.40 at least till March 2020. Going forward, RBI’s monetary policy and global news flow will have an impact on the rupee as the sentimental impact of the Budget will fade with time. However, the pair is expected to continue to trade between 70.70-72.20 levels until the current financial year-end.

Amit Pabari is the MD of CR Forex Advisors