sensex: What lifted the mood to help Sensex log best Budget Day gain? Analysts decode

NEW DELHI: Budget 2021 impressed Dalal Street investors a lot. Unlike Nirmala Sitharaman’s last two budgets, when benchmark indices delivered negative returns on D-Days, her Monday’s Budget got a big thumbs up by investors as Sensex rallied 2,315 points.

Analysts noted that there were fears of an introduction of a Covid cess, higher capital gains tax and wealth tax, none of which materialised in Budget 2021. Even the tax of cigarettes were left unchanged, something that looked highly unlikely a day ago. No bad news is good news.

Budget checked most of the boxes, be it boosting infra spending, capex revival, increasing FDI limit in insurance sector, scrappage policy for auto and tax exemption for housing, among others. The fiscal deficit target for FY21 was raised to 9.5 per cent of GDP, but the target was set at 6.8 per cent for FY22. The expansionary target is seen aiding the economic recovery.

Other than that, a lower divestment target of Rs 1.75 lakh crore looked achievable, analysts said, given the strategic divestment pipeline and the much-awaited LIC IPO. Several measures made for relaxation of compliance and procedural burdens in multiple spheres of activities was welcomed by the Street.

“The FY22 budget has been much better than the market’s expectations. The feared and anticipated measures around Covid cess, higher capital gains tax and wealth tax, etc did not materialise. This will provide a huge relief and help in sustaining the buoyant sentiment in the economy,” said Motilal Oswal of Motilal Oswal Securities.

“The government has clearly articulated the focus towards infra and capex spending with five key measures: Raising capex spends by 26 per cent against FY21’s revised estimates; setting up of development financial institutions, setting up of ARC/AMC to deal with stressed assets; asset monetisation plans in various segments and CPSEs for divestments. The significant increase in allocation to healthcare sector should lift the general well-being in the economy, in our view,” Oswal said.

Gurpreet Sidana, Chief Operating Officer at Religare Broking, said while fiscal deficit estimates may have gone overboard than market expectations, the market would take it in its stride citing the overall economic situation and growth prospects.

“Amid all, the markets heaved a sigh of relief as there was no announcement on any kind of additional cess for Covid-19 and no increase in LTCG/STT/STCG taxes,” he said.

B Gopkumar, MD & CEO at Axis Securities, called the Budget well-balanced looking at the government’s borrowing. The proposals for the financial sector, which includes privatisation of public banks and asset reconstruction companies, were significant positives for the financial sector. Overall, the budget has checked most of the boxes and will help the economy.”

Banking and financial stocks accounts for over a third of index weightages.

Meanwhile, FM said dividend payments to REIT and InviT would be exempt for TDS. She announced deduction of tax on dividend income for foreign portfolio investors at a lower treaty rate. Also, her Budget proposed advance tax liability on dividend income only after declaration or payment of dividend.

Data showed domestic equity indices have declined in 10 out of past 17 Budget Days, with an average drop of 1.8 per cent. Equity markets reacted negatively to both the budgets that Sitharaman unveiled previously. On the Budget Day in FY20, the equity index declined 2.5 per cent while in FY19 (full year budget), the market fell 1.1 per cent – both fairly large moves.

Nilesh Shah of Kotak AMC said that this was a growth-oriented budget which will support the equity market. Asset monetisation, strategic divestment and auto scrappage policy were all positives, he said.

“The budget has laid the foundation for growth beyond FY 22 through selective protection to domestic industry and encouragement via the PLI scheme,” Shah said.

What’s ahead? History has a clue.

Historical data shows a high correlation between market direction on Budget Days and stock returns for the following month.

In post-Budget months, the stock market has usually followed the Budget-Day momentum in 11 out of last 17 Budgets. In the six instances that saw a divergence, the absolute difference in the returns wasn’t very high, Bernstein said in a note.