Why equity markets surged more than 2 per cent a few days after Union budget

Two days can make such a big difference. On Saturday, equity markets had tanked after the Union budget, which lacked any specific stimulus that many had expected would be announced to kick-start the economy, failed to excite investors. While there was gloom on Saturday, on Tuesday, the markets were in an exact opposite mood, with the benchmark BSE Sensex jumping 917 points or 2.30 per cent to close at 40,789.38 points. The NSE Nifty 50 index surged 271.75 points to close at 11,979.65 points.

What led to the euphoria return on Dalal Street? A few key things stand out. For one, the budget is now behind us, and while there wasn’t any stimulus or no rollback of the long-term capital gains tax on equity, the finance minister did try to woo foreign investors with measures like increasing FII limits in corporate bonds. The scrapping of dividend distribution tax is expected to boost corporates further, while the newer lower personal income tax regime, sans deductions, will put more money in hands of at least some people, who may not be claiming all the deductions, which may aid consumption to an extent.

Furthermore, data released on Monday showed that India’s manufacturing PMI rose to 55.3 in January, its highest level in almost eight years, suggesting that the economy may finally be seeing some signs of a turnaround. Crude oil prices have tumbled in recent days, touching 13-month lows on Monday, as the coronavirus outbreak in China and the various quarantine measures the government has taken, including shutting public transport in a few cities and ordering factories to remain shut till February 10, is denting demand. Given the fiscal deficit pressures, falling prices are a boon for India, which imports 85 per cent of its crude requirements.

Bounce back in global equity markets also weighed on the buoyancy among Indian investors.

“A global rally in equities post a correction due to the coronavirus had positive rub off in India. With the budget fully digested, the drop in oil prices is a big positive for India,” said S. Ranganathan, head of research at LKP Securities.

The market also witnessed short-covering and buying in heavy weights, he added.

“Post budget, the market has shifted its focus back to fundamentals and earnings. With strong PMI data, in-line January auto sales numbers and decent third quarter earnings season so far, the sentiments have turned positive,” said Siddhartha Khemka, head, retail research at Motilal Oswal Financial Servies.

On Tuesday, 28 stocks out of the 30-share Sensex ended in the green. Watch and jewellery maker Titan surged 8 per cent after it reported a 13 per cent rise in quarterly profit. ITC, HDFC, Bajaj Finance, Tata Steel, Power Grid, Hero MotoCorp, Mahindra & Mahindra and HDFC Bank were among the other major gainers, all rising over 3 per cent.

Tuesday’s rally was broad-based, with the BSE Midcap and Smallcap indices also rising 1.3 per cent.

“Market witnessed a V-shaped recovery post the overreaction on the budget day, as the expectation was too high. Market is focusing on the earnings growth and global trend, Q3 has provided a positive trend to earnings,” said Vinod Nair, head of research at Geojit Financial Services.

Analysts though advise caution and feel that with the coronovirus outbreak yet to be contained, markets may remain volatile in the coming days.

Meanwhile, all eyes will now shift to the Reserve Bank of India. The monetary policy committee will announce its final bi-monthly policy of the financial year-ending March 2020, on Thursday. Given that the retail inflation is trading well above RBI’s target of 4 per cent, the central bank is largely expected to keep interest rates on hold. However, RBI’s stance and outlook will be a key thing to watch, say analysts.