The biggest takeout is that the government is concerned about the slowing economy…

Last week market was cautiously waiting in expectation of the government’s corrective and supportive measures for the economy. Market was worrying that given a weak fiscal position, the government measures may not be able to benefit the economy. But the actual announcement has lifted the sentiment of the market, stating that the government is concerned about the slowing economy and wants to boost the confidence and business spirit in the country. As the government announced rollback of enhanced surcharge on FPI’s to the pre-budget status, other key takeaway was speedy recap of public banks by Rs70,000cr, additional support of Rs20,000cr to housing finance, tax relief to startups, payment of GST refunds to MSMEs, additional depreciation of 15% for buying new vehicles and lifting the ban on the purchase of new vehicle by government to replace old ones, giving a momentum to the ground reality. The FM’s speech also cleared some logjams in the market and business environment spreading the positive intention of the government and plans to come out with more measures in the future and motivate the economy.

Retail investors will like to know whether this announcement and likely more measures in the future will be good enough to change the consolidating market. There are no correct answers to that, but we are currently experiencing marginal reversal in the trend. Nifty50 is up by 1.9% from last Friday to Wednesday, and we are expecting this positive trend to continue in the short-term due to the positive impact on the future scenario and hope for more measures.  There may be more depth in the view given the fact that the risk regarding the weak fiscal position of the government has reversed due to transfer of Rs1,76,051cr from RBI to the consolidated accounts of the government. This strengthens the financial position to come out with more supportive measures and improves fiscal discipline. Having said that, technically this is about Rs70,000cr more than the budgeted amount which could be good enough to recover the part of likely shortfall in tax revenue and meet the fiscal target, due to slowing economy. Hence, we should not be expecting huge fiscal measures like higher government spending and tax cuts rather than supportive measures and likely change in policy.

In the near-term we can also expect a reversal in FPI selling, who have sold a net amount of about Rs26,000cr in equity from 1^st July to 23^rd August, from the budget day to the recent announcement. FPI inflows will also be supported by risk-on mode in the global equity market which has found some positive momentum in the short-term in expectation of resume of trade talks between US-China with a plan to bargain the situation given a slowdown in trade impacting both the countries.

The final trend of the market will depend on new announcements and its real benefit to the economy. And also, as per the trend of the global market which has been weak during the year due to slowing world economy, trade discrepancies, risk of recession and fall in bond yields, having a ripple effect on the market.

Posted: August 29, 2019.