Markets on a roll

The stock market has been exuberant since Budget day, with the Sensex reclaiming the 50,000 points mark and the Nifty 50 racing past the 15,000 points mark before retracing its steps. The upswing last week may not be wholly related to the Budget, though. The market has been closely entwined with its global counterparts over the past year and last week’s movement should be seen in the context of a global rally caused by hopes of another tranche of stimulus amounting to $1.9 trillion in the US, and increasing optimism driven by the progress in Covid vaccination. That said, domestic players were quite pleased with the Budget due to three main reasons. One, contrary to expectations, the Finance Minister did not throw any negative surprises on investors such as a hike in securities transaction tax, capital gains tax and so on. Two, the Centre’s intent to do whatever is takes to boost growth, even at the cost of running a large fiscal deficit and expanding the borrowing, seems to have pleased the market. Three, the Budget addressed some of the issues that foreign portfolio investors have been complaining about.

FPIs form the largest category of active investors in the Indian market and it is welcome that the Budget tried to assuage their concerns. FPIs had been irked at the over 20 per cent TDS on dividends paid to them, while according to tax treaties, the deduction should have been much lower. By allowing companies to withhold tax on dividends at treaty rates, ranging from 5 to 15 per cent depending on the country of origin, the Budget has addressed one of the major complaint of FPIs. The Budget has also made it easier for foreign funds to move from other jurisdictions to the GIFT City IFSC, without having to pay capital gains tax on notional profits on the books. Relaxing of some of the conditions set out for sovereign funds investing in infrastructure sector will hopefully see more foreign funds moving in to this segment. Similarly, the proposal to allow foreign investors into REITs and InVITs will help the infrastructure segment garner some much-needed funding from overseas.

With the Budget now behind, investors’ attention will shift towards corporate earnings, that have been reflecting the relative resilience of the larger companies in weathering the pandemic impact. The progress of Covid vaccination along with decline in number of active cases is instilling confidence among investors regarding consumption returning to pre-Covid levels soon. The government’s large spending on capex along with higher commodity prices is going to see demand improving for many listed companies. While valuation is getting pricey in many pockets and bouts of volatility driven by global factors cannot be ruled out, the domestic conditions for equity investors have been rendered largely positive by the Budget. The renewed bullish sentiment is not surprising.