The markets have seen a lot of volatility in recent times. First, the high in early 2020, then the crash followed by a recovery that managed to wipe out the March 2020 lows. Last week, the Sensex and Nifty scaled all-time highs at 50k and 14700, and later closed lower, unable to sustain the peaks, because of profit booking and other global developments. Meanwhile, with Budget 2021 coming up, there is going to be some sort of an impact on the markets.
The run-up to the Budget, which will be presented on February 1, is likely to show some market volatility, analysts expect. The earnings season that is currently underway may also add to the volatility. NSE India’s VIX index, which is a measure of volatility is up to 22.42, from the earlier 22.18.
Dalal Street is hoping for a Budget that is focused on reforms and growth that triggers capex cycles to boost the economy. Expectations have risen after a Finance Minister’s quote hinting that this budget would be “unlike anything” in the last century.
The economy stepped into a phase of a technical recession in the first half of the financial year, following the Gross Domestic Product (GDP) collapse of almost 24 per cent y-o-y in April-June period and yet another 7.5 per cent between July and September. CARE Ratings expects the fiscal deficit target to be in the range of 5 and 5.5 per cent for 2021-22. The focus is likely to remain on growth and revival in FY22 rather than fiscal issues.
A stimulus for sectors such as real estate, textile and auto may boost employment, thereby raising market hopes. Stimulus packages or incentives for hospitality and travel will also open up the sector to economic revival and activity.
One of the biggest expectations from D Street is that the government exempt tax on LTCG or long-term capital gains that arise from the sale of listed equity shares. This is likely to buoy the markets. There are also expectations that Securities Transaction Tax (STT) and Commodity Transaction Tax (CTT) will be lowered as well. Relief on the tax front for the salaried class to soften Covid impact may also seem like a positive move for the markets. Measures like a Work-From-Home tax deduction may also ease salaried employees’ burden and put more money in the hands of the salaried class to direct towards investments. This may come as a boost for the markets as well.
Focus on infra
CARE Ratings notes that capital expenditure for 2021-22 is predicted to be in the Rs 5 lakh crore, as compared with the Rs 4.1 lakh crore that was the target last year, apart from another Rs 25,000 crore announced as part of many Atma Nirbhar programmes. The capex would focus on infrastructure development and creation. There will be a greater focus on roads, ports, railways, agriculture and power, and other allied sectors, which will see a boost in allocations. The focus on infrastructure is bound to generate employment and revive economic activity. Markets are likely to see this development positively, especially if this boost on infra will pump in FDI.
Recapitalisation of banks
The banking sector bore the brunt of the Covid-19 impact, thereby pushing up the number of non-performing assets, which were already under stress. A move that D Street may view positively is the move to recapitalise and revive the sector. The talk of a bad bank which will buy bad loans from banks at market price will help banks boost new businesses, thereby creating a cycle of economic revival and money flows.
As we have seen, the last year has been unprecedented in terms of a public health crisis and the Budget is likely to turn its serious attention towards healthcare. The government also needs to allocate funds for expenditure pertaining to vaccination for at least frontline workers and vulnerable sections of society. This means there is a likelihood of an additional 40 per cent towards healthcare allocation in the budget. The total allocation in the last budget for health was over Rs 67,000 crore.
The year ahead could be one of consolidation as foreign institutional investments flow in and vaccinations pick up. Low-interest rate patterns are likely to be unchanged as central banks globally look to boost liquidity in economies, thereby keeping the markets positive. The markets are likely to be positively impacted on the back of a budget that focuses on reforms, investments and growth.