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03-02-2010, 05:20 PM #1NιѕнyGuest
Partial rollback of fiscal stimulus in line with mkt expectations
[DOWN]The market appears to have given a thumbs up to the Union Budget for 2010-11 with the Nifty ended up 62 points to close the session at 4,922, a
gain of 1.6% during the week.
The market appears to have taken the stimulus withdrawal in its stride. What cheered the market sentiment is the fact that the finance minister has addressed the key issues of containing fiscal slippage and has outlined a clear road map for fiscal consolidation for the next three years. According to analysts, this indicates the government’s net borrowing is under control and is unlikely to put pressure on interest rates.
Staying away from touching tax proposals that directly impact capital markets such as capital gains tax, securities transaction tax and dividend distribution tax, led to a positive sentiment. The slabs for personal income tax have been widened, thus giving higher disposable income in the hands of the consumer. The FM also moved a step further on the tax reforms by commitment to implement GST from April 2011. Added to all this, another reason for the markets to react positively is that expectations were relatively low from the budget and there are no apparent negatives.
The partial rollback of fiscal stimulus in form of excise duty is in line with the market expectations, and is considered prudent by the analyst community. Coming to government finances, the target of bringing the fiscal deficit to 5.5% seems to be achievable. The finance minister has assumed 18% increase in gross tax receipts and relatively much lower total expenditure growth of 8.5% (5.8% in revenue expenditure). From the stock market, the event namely the budget is out of way, and the market will concentrate on earnings during the quarter. Though too early to say, as per some analysts, the Sensex earnings could decline marginally as analyst adjust for the higher minimum alternate tax (MAT) rates (15% to 18%). Besides this, there could be some small negative impact of excise duty rollback on automobiles. However the positives seem to far outweigh the negatives at the moment. Rs 1 lakh invested in S&P CNX Nifty index in one week grew to Rs 101,597 in one week. A Re 1 lakh investment a year back would have appreciated to Rs 176,702.
Inflation worries on the food front continue to haunt the bond markets. The 8.24% GOI bond maturing in April 2018, closed marginally higher at lower at Rs 102.99 compared to Rs 102.48 a week back. Bond investors saw Rs 1 lakh invested in the 10-year benchmark bnd appreciating to Rs100,495. However, had the investment been made a year back the value would have shrunk to Rs 92,318. Black gold -crude – fell to $ 77.92 per barrel from $79.06 per barrel a week ago. [/DOWN]