After volatile session, stocks end on a high
Indian stocks ended higher on Friday in a volatile session after finance minister Piyush Goyal proposed steps to boost consumer spending, even though investors remained worried about fiscal discipline.
The BSE’s benchmark Sensex rose 212.74 points, or 0.59%, to 36,469.43, while the National Stock Exchange’s Nifty index gained 0.58% to 10,893.65.
In the past 12 months, the Sensex rose 1.57%, while BSE MidCap and BSE SmallCap fell 15.23% and 25.47%, respectively. Fears of a global slowdown, high crude prices and a weak rupee have weighed on equities.
The India VIX index, the so-called fear index, fell 8.2% to 15.72. The volatility index typically has an inverse correlation with the benchmark indices. VIX is the investor’s perception of the market’s volatility in the near-term.
The low number indicates that investors are not expecting any major correction at least over the next month.
Ahead of the general elections due in April-May, the interim budget for FY20 had a strong focus on the rural and agricultural sector, sops for the middle class and workers in the unorganised sector, along with a broader social push. However, there was a marginal slippage in the FY19 and FY20 fiscal deficit targets.
The government missed its FY19 fiscal deficit target of 3.3% of GDP and instead pegged it at 3.4%. It also budgeted the FY20 fiscal deficit target at 3.4% of GDP, missing the glide path target of 3.1%.
“Overall, the government presented an expansionary budget and prioritised populism over fiscal prudence. The deviation from the FY19 fiscal deficit target and the “pause” on FY20 fiscal consolidation is a negative surprise, relative to our expectations,” Nomura said in a February 1 note.
However, it added that the cumulative effect of the cash transfer to farmers and the middle income class will be boost consumption, but likely at the cost of crowding out private investments. “This growth mix generally tends to be a negative for macro imbalances,” Nomura added.
Economists said the Reserve Bank of India will be cognisant of the risk to inflation from fiscal slippages going forward and, hence, expect the Monetary Policy Committee (MPC) to keep rates on hold in the upcoming policy review. Nomura expects the central bank to keep the repo rate unchanged on February 7.
Radhika Rao, an economist with DBS Group Research, expects the RBI to keep interest rates unchanged for the rest of 2019.
“The consumption-push and growth stimulus will be positive for growth, but limits scope for an aggressive monetary easing cycle.”
India’s 10-year government bond yield rose nearly 10 basis points on Friday as analysts expected the government to face challenges in meeting its target for fiscal year 2020.
The yield on the most-traded 2028 bonds ended at 7.61%, rising 13 basis points from its previous close of 7.483. Bond yields and prices move in opposite directions. The rupee fell 0.24% to 71.26 a dollar from its previous close of 71.09.
Moody’s Investors Service said given that no new policies to increase revenues were announced, while a number of expenditure measures were announced, it will increase outlays and put pressure on the government’s ability to meet the fiscal deficit target. Moody’s was also concerned that the continuing slippage will be credit negative for the sovereign.