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Stock markets and absence of negatives

The basic question as to whether the share market is a good enough gauge of economic policy remains unanswered even after correlating share price movements with the latest budget announcements. The budget time is when an important economic policy announcement is "evaluated" by the markets almost instantaneously. This year, the benchmark index, the Sensex, that had climbed to record five figure levels before the budget, as well as the Nifty, continued to move up after it, seemingly taking the budget proposals in their stride. Whether the market's response is the beginning of a process by which even the normal excitement related to the budget fades remains unclear. Be that as it may, weeks before the budget there was widespread expectation that the sustained upward share price movements would inevitably be followed by a correction. Budget 2006-07 was expected to set the tone for the future direction of stock prices. But it was more than a week after the budget that the share indices fell sharply, only to recoup spectacularly in the following days. And on March 17, at one point, the Sensex came within striking distance of 11,000.

In the latest budget, the basic rates of both corporate and personal taxes were left unchanged but the securities transaction tax, which impacts the market directly, was increased. Some of the measures perceived to be in the nature of a reform are an accelerated movement towards a single Cenvat rate and the slight downward adjustment in the peak customs duty. While the road map for a uniform tax on goods and services (GST) was unveiled, a renewed emphasis on fiscal consolidation was the most striking feature of the budget. The Finance Minister introduced some significant measures for strengthening and extending the reach of the debt market. So far as the equity segment is concerned, the reaction to the fiscal proposals was in line with popular perception; the absence of major negatives or controversial proposals was itself seen as a positive factor. Hence for the vast majority who did not get definite clues from the budget as to which way the markets would go, it was back to grappling with the same set of factors that had underpinned stock price movements recently. In this calendar year, foreign institutional investors (FIIs) have so far invested almost $3.1 billion. In many companies the permissible limit for FII investment has long since been reached. With many institutional investors opting to stay invested in certain promising sectors such as cement, there is a serious mismatch, with demand running far ahead of supply in the case of quality scrips. Domestic mutual funds have recently mobilised very large sums and, although they now have a greater leeway to invest abroad, the bulk of their investments will be in the domestic market. All these developments suggest that the stock markets will remain strong. For now at least, not many are heeding the warning from some leading investment bankers that Indian stocks are overvalued.

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