Brace for corrective steps as Budget rally short-lived

MARKETS were on a roller coaster ride and the budget has given them a fillip which has not been witnessed over the last 20 years. Earlier during the week, markets continued their downward spiral to end with significant losses on Thursday and Friday.

The low seen on BSE Sensex was 46,160.5 points while it was 13,596.80 points on NIFTY. Post the announcement of the budget on Monday, the markets recovered more than the lost ground of six consecutive days of losses, and even posted new lifetime highs on Wednesday. The previous highs were made on January 21 from where the correction began. The highs made on Wednesday were 50,526.39 points on BSE Sensex and 14,754.90 points on Nifty. The close for the week on Wednesday was 50,255.75 points, a gain of 2,845.82 points or 5.66 per cent while it was 14,789.5 points, a gain of 821.95 points or 5.56 per cent for Nifty. The three-day rally could be described as miraculous.

There is just one reason for this rally and that was that the markets liked the Budget. Certain things which were expected to be introduced and would have been considered negative did not happen. For example, there was no tinkering with long term and short-term capital gains tax. Widely expected Covid-19 cess was not introduced. The Finance Minister took bold steps and introduced a budget which bets on infrastructure and production linked incentives to bring about a change and kickstart the economy. The Budget proposes to privatise and bring about better participation under the PPP model.

Many more trains would be allowed to be run under this scheme. Furthermore, major railway stations would be redeveloped. Ports and airports would be brought under the privatisation model. The primary aim is to kickstart growth and use the multiplier effect to good use.

The government has not raised taxes or done much tinkering with customs duties. There has been a change in some items where the duties have been lowered and some more where they have been raised, but the number where they remain unchanged is far higher.

In terms of change, the government has introduced an agri, infra and development cess on products like petrol, diesel, gold and liquor amongst others. This is revenue neutral as the currently charged duties or taxes have been proportionately reduced.

The Budget has allowed 74 per cent FDI in the insurance sector. While this is unlikely to have any immediate benefit on the three listed players in the stock exchange immediately, this could have a bearing on new global players looking to enter India. The three listed players are Prudential with ICICI, Standard Life with HDFC and BNP Paribas Cardiff with SBI. These three partners may in the medium term look to upping their stake if they feel the need with more competition. In primary markets, three of the four IPOs have listed. IRFC the government company is trading at a discount; Indigo Paints had a stellar debut and is up over 90 per cent over its issue price while Home First managed to close a couple of percentage points higher than the issue price. The fourth and final issue from Stovekraft Limited would be listed on Friday.

Markets have fallen and then recovered much more sharply than expected. The budget rally has been stupendous and unparalleled. It has forced all shorts to be covered and FPI's who had turned sellers during the last week of January 2021, have turned net buyers again. What next? The rally seems to have run its course for the time being.

While I am not suggesting that the bull market is over by any means, it would be fair to assume that in the short term, the sharp rally is done with. Expect markets to look to consolidate after these super volatile moves over the next couple of weeks. Markets are likely to provide plenty of trading opportunities.

Trade cautiously and use wild swings to sell into and sharp falls to buy. Choose them carefully as many opportunities would arise in the near term.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)