How will markets react on Budget 2020? Some Perspectives.
Very few at this point would disagree that the government finances are terribly strained. Fiscal slippage is imminent. Growth is weak and Central + State + PSU debt as a percentage of GDP is alarmingly high. What the market would want to see from the government in the budget is how transparent and candid it is about the current situation and how committed it is to initiate measures to revive growth.
The focus sectors of the budget would be watched closely. Concrete demand stimulating measures would be received well. Well directed infrastructure spending is the need of the hour as it would have a cascading impact on demand. An increase in CAPEX as a percentage of total expenditure would be a welcome move. Other key focus areas should be agriculture, manufacturing, and exports.
Acknowledging the fact that fiscal slippage was on account of structural reform (cut in corporate tax) and that it could slip in the next couple of years as well in an endeavor to stimulate the economy would augur much better than window dressing numbers and projecting revenue numbers that are far fetched. Overambitious estimates of disinvestment and GST collections would spook markets. Rolling out new schemes without laying down how these would be funded and without elaborating on how they would be executed would not go down well with markets. In fact, redirecting expenditure away from schemes that have not worked well in the past towards initiating demand augmenting measures would be a wise decision. It is a very delicate balancing act that the FM has to perform between stimulating growth and containing deficit. The mantle of putting the economy back on a firm growth trajectory rests squarely on the government given that the room for monetary policy accommodation looks limited. The government's credibility is at stake and investors, both domestic and global would be watching closely. The last person one would want to be at this point is the FM.
(Average volatility observed in Rupee and Nifty is 0.5% and 1.5% respectively)
View on Rupee, Equities, and Bonds:
Rupee is consolidating in a broad 70.50-72.50 range. Break in either direction could entail a vertical move in that direction. We expect the RBI to intervene to smoothen volatility.
The budget this time around is on Saturday but stock markets will be open that day. 11800 is a crucial support for the Nifty, break of which could convince market participants that a medium-term top is in place. On the upside, a break above 12400 could prove to be the beginning of a fresh leg towards 12800.
6.85-6.90% is a strong support for the 10y benchmark bond. 6.42%, on the other hand, is a strong resistance. We expect measures to deepen domestic bond markets to be announced in the budget.
We put together our take on the major domestic and global factors driving risk sentiment over the medium term with special emphasis on political developments, monetary policy outlook and fiscal policy implications.
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