THE GREEN MILE OF MARKETS - HOW LONG WILL IT RUN?
By Ruma Dubey
If the reaction of markets during the Budget speech was violent, the bounce back yesterday and today is nothing less than euphoric. This sharp change in behavior is typical of someone who is either psychotic or allows sentiments to rule over everything else.
The markets are both and that is why we see these wild mood swings. But the moods have tilted towards the bullish, and no one is complaining! Though the markets, for now, seem to be strongly entrenched in the green, there is cautious optimism and fear lurking – is this for real and sustainable?
First, let’s try and understand the ‘real’ part. There are several reasons why the markets are up:
1: Hope that RBI will soon announce an out-of-turn reduction in interest rates, much before its scheduled meet of 5th April, as early as next week.
2: ITC is a heavy weight and its movement, upward or downwards does have an overall impact on the indices. So this stock has recovered dramatically as almost all fund houses have put out reports saying that the hike in excise duty was not as steep as expected and hence all is well. Obviously, the company could see some impact on volumes but it will pass on the duty hike to the customers.
3: Ditto for stocks like Maruti; the entire Auto sector was down deep in the red post the Budget and now it has turned green. The market has logically got it all sorted out – all duty hikes will be passed on the customer but when RBI reduces rates, won’t the EMIs also come down and give them an advantage? So to some extent, the auto stocks are factoring in the rate cut.
4: Bank stocks were badly battered. And now the very same stocks, almost all the 26 bank stocks are in the green. Apart from attractive valuations, today, the RBI eased the liquidity crunch after it allowed banks to recognize some balance sheet items as common equity Tier-1 capital. This will reduce the burden on banks capital adequacy needs. It is expected to free up some Rs.35,000 crore into the economy.
5: The foreign investors are happy – they have been appeased on the retro tax front and FM showed fiscal prudence by sticking to the fiscal deficit target of 3.5% for current year.
6: The market was expecting a major hike in service tax – that did not come but it did come in on the sly – we are already paying 0.5% cess on Swachch Bharat and now another 0.5% has been added for the benefit of the farmers.
7: There was no hike in capital gains tax and that, the markets feel was a good move.
8: Securities Transaction Tax (STT) of 0.05% was levied on options and this, the market feels does not hurt it much.
In a way it is now a relief that Budget overhang is gone and it is back to RBI and GST. The market is optimistic that during the second half of the current Budget session, the GST Bill will get passed. Fingers crossed on that!
And the second question – is this rally sustainable? Well, if one expects that the bullrun will continue for a month or so, that’s really being foolish. Thus it seems sustainable in the short run. But soon this euphoria will die down and it will be back to event based movements – RBI rate cut, the US Fed meet on 17th night. But if the GST does go through, yes, we could have a longer green mile.
For now, enjoy the moment. China’s Q4 GDP numbers are due any time now…keep a watch on that and how the global markets react.
Yes, the market is essentially about living in the moment. Isn’t that how it is for everything which is high on the emotion quotient?