Budget 2016: Equities recover most losses, now bank on RBI's rate cuts

The Union Budget announced by the finance minister, Arun Jaitley, on Monday has been hailed by market players though intraday equities fluctuated wildly as hopes of tax sops in income as well as in securities transactions were dashed. However, by the end of the day, equities recovered most losses.

The BSE Sensex ended 0.66% or 152.30 points down to close above the 23,000-mark at 23,002 while the Nifty 50 closed a tad below the psychological 7,000-level at 6,987.05 or 42.70 points below the previous close.

"The budget was not just well-balanced but also politically a correct one, and leaves no room for criticism by opposition political parties," said a senior analyst at a foreign fund.

Dealers said the market expectation on the government's budget on Monday was much more than what was announced but now that Jaitley has met his fiscal deficit target of 3.9% for FY16 and announced a 3.5% target for FY17, hopes of a steeper cut in interest rates have outstripped the earlier expectation of STT waiver and hike in income tax slabs.

Already, the secondary market 10-year yields have dipped following the Budget presentation. The 10-year bond yields fell from 7.78% to 7.64%, indicating the onset of a rate-cut.

According to Vijay Singhania, founder-director at Trade Smart Online, the market was trying to push itself up on hopes that the government would hike the income-tax slabs for the middle-class and that securities transaction tax (STT) would be done away with. Both the events did not occur. In fact, the government increased STT on option trading from 0.017% to 0.050%, and that dampened the sentiment momentarily, he said.

During the day, the BSE Sensex fluctuated wildly by 848 points while the Nifty swung 269 points before ending the day by recouping most losses.

"The trigger for the market will now come from global cues," said V K Vijayakumar, investment strategist at Geojit BNP Paribas.

"The markets are now back to ground reality even though service tax hike has been minimum at 50 bps to 15% as against the speculated 150-200 bps hike," he said.

The Budget's move to tax dividend distribution on such incomes above Rs 10 lakh at 10% has also not come as a surprise to market participants.

"This will impact the high net-worth individuals," said Singhania. For an income of Rs 10 lakh, the average investments, assuming a 1.5% dividend yield, should be around Rs 7 crore, hence the move does not impact retail investors.

However, the market is now looking forward to the softening interest rate regime. "So long the RBI has been worried over the government's fiscal discipline, now that the government has met its committed target of 3.9% and has an ambitious fiscal deficit target of 3.5% for the coming year, the ball is in RBI's court to lower rates," said a senior foreign banker.

Meanwhile, the markets will now look at China and the US for a direction. "There are green shoots emerging from the US on the growth front and with China now assuring it would not depreciate yuan, there's resilience on the global economy front," said the banker.

Till then most market players expect Nifty to move in a 400-point range between 6,800 and 7,200.