MARKETS TURN CAUTIOUSLY OPTIMISTIC

about 25 days ago
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The market was expected to jump up 1000 points when it opened for trade on Monday. At least that is what the man on the street expected. The biggest bone of contention which saw the markets dip precipitously every day was the surcharge on FPIs. With that removed, the obvious reaction was a huge jump.

But then Trump, like always, spoilt the party even before it began by raising the rhetoric and tax on its ongoing tariff war with China. So from domestic issues, the attention was taken over completely by global concerns and that is the reason we saw the market showing a much tepid reaction to the FMs announcements. As the afternoon session progressed, looks like the full import or the long term benefits of the rollbacks have sunk in and the markets are up on a decisive route northwards.

Global brokerages are happy and they are issuing gushing statements, a complete turnaround from last week. Suddenly, with surcharge going, they are optimistic, so much so that over the weekend alone, post this development, with economic slowdown story remaining same, they expect the Sensex to go to 40,500 levels over the next 4 months.

Nomura has gone on record saying that the new set of reforms announced by the FM are serious and much-needed booster shots for the economy and expects growth at 6.6% in H2FY20, a big jump from 5.8% in H1FY20.  For many the mere acknowledgement by the Govt that there is a slowdown is very good as it will now mean that the Govt will go all out to boost GDP.

At this juncture it would be better to be cautiously optimistic as the global headwinds are not very positive. Many are saying that the measures announced on Friday are all benefitting only the rich and super rich while on the ground, for the poor, nothing has changed. Yes, at this point, it does look like that but employment and demand booster will come only if industries do well. The Govt has decided to work from top to bottom and many feel that sentiments and confidence will go up only if the stimulus comes from the bottom to top by increasing money into MNERGA and other welfare schemes. But the fact is that for the Govt to give sops to the poor, there is simply not enough money in coffers. Thus in many ways, given the fiscal situation we are in, this is the best the FM could have done under the present circumstances.

The market will also be happy with the RBI accepting the Jalan Committee report which basically advocates transfer of surplus funds/profits held by the RBI to the Govt and of course, a more generous dividend payout.  If the FM on Friday announced a stimulus, today, once the RBI accepts the Jalan committee report, the transfer of surplus funds should help the Govt retire public debt and recapitalize banks and this should help it drive the credit cycle. Some Rs.3 to 5 lakh crore is expected to be released; well the Govt was always eyeing this money and now with the recessionary trends, this will soon become a reality. But how this money is used will be pertinent; using this money to refinance banks which will once again increase NPAs and bailing out loss making PSUs will not go down well.

As the festive season comes calling and if the harvest turns out to be good, automatically consumer demand will rise and sentiments will get boosted. But this is not going to happen overnight; we should expectantly look at the second half of the fiscal as Q2 will also remain muted or even worse than Q1.

Well, for today, we can only tell ourselves that the Govt got off its high horse and accepted the slowdown. In the short term we might not see an immediate jump but in H2FY20, we will see a turnaround, slowly but surely.  Now if only someone could control Trump……

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