Post-budget selling pressure to persist in stocks

A higher than expected fiscal deficit target for FY19, possible hawkish stands by the Reserve Bank in the upcoming monetary policy and dampened investor sentiment due to LTCG will have a short-term impact on the market.

Experts predict that the market may see more selling since the correction was long overdue.

“As per open interest (OI) data, we may see the range for Nifty to be 10,600-10,900 on the upside. If the support at 10,600 is taken out, we may see correction extending to 10,480. Any upside in the market will be an exit opportunity for bulls while adding a position for bears. So we may see further pressure on any rebound. Only a close above 10,900 will see a resumption of bulls,” said Mustafa Nadeem, CEO, Epic Research.

“Higher than expected fiscal deficit target for FY19, rising inflation and yield may push the RBI to be more hawkish on interest rate in the upcoming monetary policy. Introduction of LTCG will have a short-term impact. But history points out that the budget-led volatility may not extend for long and focus will change to earnings and other macro developments,” said Vinod Nair, head of research, Geojit Financial Services.

“Market correction is likely to reduce the excesses that were happening where risk aversion was difficult to find,” said Arun Thukral, MD & CEO, Axis Securities.

“Uncertainties over the execution of spendthrift budget without tampering fiscal deficit target have fuelled the current volatility and may compel the RBI to take a more hawkish stance in the upcoming monetary policy meeting,” said Anand James, chief market strategist, Geojit Financial Services.

The market, after staying in the overbought territory, finally took a negative turn indicating a possibility of a larger correction.After 8 weeks of consecutive uptrends, it saw a ma­ssive co­rrection a day after the bu­dget, with the Sensex plunging by 2.8 per cent on the back of profit-booking and negative global cues. “Re-introduction of LTCG tax was anticipated and there were sound economic reasons for it to be re-introduced in the budget. In the absence of LTCG tax, there was a risk of misallocation of capital, bei­ng skewed towards the equity markets. But the tax rate coming in as high as 10 per cent and without indexation benefit was a negative surpr­ise. A back of the envelope calculation suggests LTCG tax should bring to the exchequer about Rs 35,000 crore annually,” said Saura­bh S Jain of SSJ Finance.

LTCG tax made a high impact on the positive momentum, analysts said.

“The major part of correction on last Friday can be attributed to the budget announcement of imposition of LTCG tax on equity, introduction of a tax on distributed income by equity-oriented MFs and fiscal slippa­ge. The move surprised the street as most participants were factoring in a change in definition of LTCG to 2-3 years from a year. The markets were overheated and a healthy correction will lead to some bit of PE compression,” said Devang Mehta, head (equity advisory), Centrum Wealth Management.