Modi leaves market with tough choices

Pre-budget rally trapped between ifs and buts

Modi leaves market with tough choices
Prime minister Narendra Modi’s contention that “tough decisions” would have to be taken to put the economy back on rails, might not go down well with the market when it opens for trading today, affecting sentiments in the extreme short run and putting to rest hopes of a pre-budget rally.

Brokers and analysts say the euphoria that kicked the market to new highs following Modi’s massive win last month, was driven by hopes that his government would offer a slew of incentives to industry that has been moving in slow motion for the past three years. The benchmark Sensex has gained 4.6 per cent since May 16 on Modi’s hope rally.

Addressing BJP workers in Panaji over the weekend, Modi said “tough decisions” were needed to improve the country’s financial health. He accused the previous government of leaving the economy bankrupt.

This was the first clear signal sent out by the new PM on what Indian companies and investors should not expect from the forthcoming Union budget.

Experts believe while the investor community might now turn cautious in the run-up to the budget, the budget itself might not compromise with growth prospects. Most expected the market sentiment to revive sooner than later, and certainly after B-Day.

“We believe that a correction has been due for quite some time. The market is overbought and has been carrying huge expectations with the new government. The PM was right in pointing out that he had no magic wand to address the ongoing concerns and tough decisions were required to address the ill health of the economy. Nifty may be heading for 7,200 level, but this would not mean much,” said Prakash Diwan director at Altamount Capital.

Modi’s comment has come amid ongoing concerns over the conflict in Iraq that has resulted in crude oil prices hitting $114 a barrel in the intra-day trades last Friday. The rupee too depreciated a bit against the dollar, bringing back fears of widening CAD.

Deven Choksey, MD at KR Choksey predicted that the market could turn a bit cautious ahead of budget. “We believe the market is fully aware of some of the decisions the new government might take. The investors, no doubt, may remain cautious, as we inch closer to Budget Day. Nonetheless, we believe that the forthcoming budget would be a balanced one. The new government will look at all the aspects without compromising growth.”

Sensex fell 348 points to settle at 25,228.17 on Friday. Yet, sectoral indices such as BSE realty index, BSE metal index, BSE capital goods index, BSE power and BSE PSU index were up anywhere between 10 per cent and 24 per cent from where they stood on May 16, when the election results were announced.

Gaurav Dua, head of research at Sharekhan said, “We believe that while there might be some immediate impact of Modi’s comments on equities, the market would eventually take any short term tough decisions aimed at achieving long term goals, in the positive light. In fact, we believe foreign investors want government to act tough to meet long term goals.”

Diwan of Altamount Capital said that while there might be some disappointment if the government selectively continued with the policies of the predecessor government, including seeking arbitration on gas prices and hesitation to lower LPG and kerosene subsidies, the market would resume its upward climb following the budget.

Last month, rating agency Standard & Poor’s had said the challenge for the new government would be to regain fiscal prudence in a sustainable way. It had pointed out that the implementation of goods and services tax could help stabilise revenues, while potentially improving the country's growth prospects, by promoting interstate transactions and the economy’s overall efficiency.

“Should the next government fail to lift confidence, its task of turning the economy around will get heavier,” the rating agency had said in a note.

Foreign institutional investors (FIIs) have pumped Rs 12,852 crore into domestic equities so far this month; between May 16 and June 13, they infused Rs 18,604 crore.

A total of 212 of the BSE 500 index constituents have returned over 20 per cent during the period, 346 returned over 10 per cent during the said period.

Sensex stocks such as Larsen & Toubro, State Bank of India, ONGC and Sesa Sterlite have climbed between 43 per cent and 58 per cent since Modi’s election. Maruti Suzuki, BHEL, Coal India, Hindalco Industries and Mahindra & Mahindra (M&M) too have gained between 30 per cent and 36 per cent during the period.

In his speech last weekend, Modi said he had taken over the reins with nothing left behind by the previous government.

“They left everything empty. The country's financial health has hit the bottom,” he said.

He also acknowledged that his measures might not go down well with everybody in the short run.

Rakesh Tarway, AVP for research at Motilal Oswal Securities said, “Market wants fundamentals. A single budget cannot meet all the hopes. We see the market momentum sustaining in the medium to long term.”


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