After budget bruising, PMI balm lifts markets

Manufacturing PMI at 8-yr high offsets pressure from global stocks

NEWMUMBAI/DELHI: After a disappointing Union budget eroded ₹3.5 trillion of investor wealth on Saturday, Indian benchmark indices ended marginally higher on Monday as the Nikkei India Manufacturing Purchasing Managers’ Index (PMI) shot up to a near eight-year high offsetting pressure from global equities especially China.

Manufacturing PMI was recorded at 55.3 in January against 52.7 in December. A figure above 50 indicates expansion, and anything lower signals contraction.

The survey by data analytics firm IHS Markit that tracks around 400 manufacturers said companies recorded the strongest upturn in new business intakes for more than five years, which they attributed to better underlying demand.

Pranjul Bhandari, chief India economist at HSBC Securities said the outlook for manufacturing activity looks optimistic as the order-to-inventory ratio improved, and the business confidence index ticked up. “We think growth has bottomed out; we expect growth to rise from 4.9% in FY20 to 5.9% in FY21, but half of the uptick is likely to be due to a low base,” she added.

With improvements in a number of leading indicators, including goods and services tax (GST) collection and core sector industries, analysts had expected factory output to report modest growth in January.

The Economic Survey has projected India’s economy to grow at 6-6.5% in FY21 as against 5.8% estimated by the International Monetary Fund.

Fitch Ratings Ltd on Monday said the budget does not materially alter its view on India’s economic growth outlook. “We believe the budget contains some measures which may support GDP growth in the mediumterm, including reduced individual income tax rates, some easing of restrictions on foreign portfolio inflows, continued focus on public infrastructure spending, and schemes of which the details remain to be announced to encourage manufacturing in the electronics and textiles sectors,” it added.

However, analysts warn the stock markets currently have limited scope for any upside due to stressed corporate balance sheets, and do not foresee any rapid revival in economic growth.

According to Deepak Jasani, head of retail research at HDFC Securities Ltd, stock markets tend to show a knee-jerk reaction on budget day but a trend is established only after a detailed study of fine print of the budget. “The market was positive today after details of the budget were digested by investors. January manufacturing PMI also boosted sentiments to some extent. However, this could be a temporary bounce in the markets, it can last a few days,” he said.

In fact, data suggests that stock markets tend to fall in the month after the budget as the euphoria around it dies down. To be sure, stock markets have fallen after one month of budget in three out of five Union budgets.

The Sensex fell 4.26%, 6.17% and 7.34% in 2015, 2016 and 2019 respectively a month after the budget was presented.

The markets were expecting a more expansionary approach in the budget, but it does not tread that path and will be source of near-term market disappointment, Edelweiss Securities Ltd said.

Markets are now moving their focus to the monetary policy to be announced on Thursday, corporate earnings and the coronavirus epidemic.