Market reaction to the Union Budget was overall neutral. The income tax “gift” wasn’t enough to move the needle.
There was some apparent rationalisation of Customs duty structure as well as cuts on import duties of some key components for the telecom and IT industry and duty cuts on vehicle imports.
Other proposals related to development of agriculture and rural economy and renewables seem to be generally positive.
But in real terms, allocations to infrastructure sectors such as roads and railways seem to have shrunk while defence / aerospace allocations are just about keeping pace with inflation.
This may adversely affect the off-take of cement and steel, and slowing construction activity may also reduce employment opportunities in the sector.
Those sectors could see adverse reactions over the next few sessions.
Some analysts also feel the assumptions about crude and gas prices in the allocation of subsidies are unrealistic – that is, higher crude and gas prices will lead to pressure on the oil marketing companies.
Moreover, given that energy is India’s single largest import item, it could affect the trade balance and put the rupee under more pressure, especially in the uncertain geopolitical climate that is currently prevailing.
On the other hand, the income tax breaks may give a fillip to consumption and this could be good for sectors like FMCG, automobiles and domestic tourism.
The Nifty 50 index is down about 10 per cent from its September 2024 highs of 26,277.
The last four months have seen month-on-month (M-o-M) losses largely due to sustained selling by the foreign portfolio investors or FPIs.
They sold around Rs 88,500 crore of equity in FY25.
This has contributed to the rupee’s fall versus the dollar.
However, steady buying by Indian mutual funds and other domestic institutions has prevented a steeper downtrend in the stock market.
The benchmark Nifty is trading at a PE of 21.3x, which is close to the lowest valuation we’ve seen since lockdown.
But, it is fairly high in historic terms and it’s higher than most peer large emerging markets.
In technical terms, the index is also trading below its own 200-Day Moving Average, which is a bearish signal.
The index has found support several times in the range of 22,800-23,000.
However, if it doesn’t break out above the 26,750 level, it is likely to eventually trend lower in the medium term.
The movement on Budget Day doesn’t signal a shift in trend.
In terms of sector movements on Budget day, the FMCG, and Realty indices rose by over 3 per cent each, while the consumer durables and auto indices were up 2.9 per cent and 1.9 per cent, respectively.
The media index was up 2.2 per cent. The IT and Oil & Gas indices fell by around 1.4 per cent each.
In terms of returns in the last 12 months, the Auto index is up 20.5 per cent while the FMCG index is up 5.7 per cent.
Consumer Durables is up 23.5 per cent and Realty has risen 12 per cent.
One might conclude that the Budget has led to continuity in trends in these sectors, with a possible acceleration in the uptrend for FMCG. (The Nifty itself is up 8 per cent in the last 12 months. So, FMCG has underperformed the overall market.)
The stable performers in the last 12 months include healthcare, IT and pharma.
The two latter sectoral indices have returned 15 per cent and 19.5 per cent, respectively.
This is perhaps on the basis of higher exports driven by a weaker rupee.
Healthcare declined marginally on Budget day due to the lack of any major budgetary support and the fact that health insurance premium may not be tax deductible under the new IT regime (there were rumours to the contrary before Budget).
The IT Index reacted on Budget day, but not enough to signal a reversal in the bullish sentiment.
The media index has lost 24 per cent in the last 12 months, so the bounce on Budget Day may put it on the watchlist for bulls seeking a turnaround.
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