The Hindu Business Line : Hope and caution

Thanks to the Government's prompt and flexible response, it appears that transaction tax crisis may be resolved soon treading a middle path. However, the Left's opposition to greater FDI may not wither away soon.

ON the B-day, it seemed as if the sweet after-taste of reforms-spreading proposals was usurped by the bitterness over the tax on capital market transactions.

But this was not all. While traders and arbitrageurs on the Street saw red, the red flag carriers smelt a rat in the Budget proposal over the sectoral cap hike in insurance, telecom and aviation and vowed to hit the street.

Same boat brother: It is trifle ironical. Dalal Street, which raised an accusing finger at the Left for the collapse in May for its alleged comments on the disinvestments and the reforms, now finds itself opposing the Budget provisions along with the Left parties.

The stock market moves this week would largely depend on the resolution of the problems at hand.

According to available indications from the market players, the regulator and the Government, a solution over the transaction tax may be arrived by Tuesday. Till then the market may drift with caution and hope on this front.

But the uncertainty over the implementation of the modifications in the FDI limits, market's biggest positive dished out by the Budget, is likely to keep the bulls in chain. Higher volatility and lower liquidity are likely to be the order of this week. The key indices would translate the investors' basic instinct by moving lower.

If the Finance Minister and the Congress can remove the Left's apprehensions over the sectoral FDI limits, then the immediate clouds over the market sentiment would be off.

The truant monsoon has been causing worry. The global oil price is also another concern. But these have become irrelevant for now. The overseas and domestic funds tap may run in full volume soon after the confusion and uncertainty is over. The domestic and overseas players agree that the Budget have many positives and the overall direction of the economy is perfectly in order.

The massive TCS public offer, which is awaiting clearances and would hit the market any time, may prove to be a temporary negative on the liquidity front.

But the allowance of greater latitude to banks for higher exposure in the capital market, as suggested by the Finance Minister, may take care of such additional pressure on the liquidity.

Further liberalisation of FII limits in certain sectors and waiver of interest on brokers' fee are in the offing. Implementation of these measures is likely to draw more funds towards the equities.

Marketonomics: In the short-term stock market tends to suffer from short-sightedness. Market's sense of economy and politics is skewed in favour of immediacy. The long distance runners may play contrarians in a situation like this. But the reality is that the local stock market has a few deep pocket contrarians. Dalal Street shelves economics when writing on the political wall goes awry.

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